[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]
SOCIAL SECURITY'S GOALS AND CRITERIA FOR ASSESSING REFORMS
SUBCOMMITTEE ON SOCIAL SECURITY
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
MARCH 25, 1999
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Subcommittee on Social Security
E. CLAY SHAW, Jr., Florida, Chairman
SAM JOHNSON, Texas ROBERT T. MATSUI, California
MAC COLLINS, Georgia SANDER M. LEVIN, Michigan
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois BENJAMIN L. CARDIN, Maryland
KENNY HULSHOF, Missouri
JIM McCRERY, Louisiana
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C O N T E N T S
Advisory of March 18, 1999, announcing the hearing............... 2
U.S. General Accounting Office, Hon. David M. Walker, Comptroller
Social Security Administration, Stephen C. Goss, Deputy Chief
Actuary, Office of the Chief Actuary........................... 37
Center on Budget and Policy Priorities, Wendell Primus........... 60
Employee Benefit Research Institute, Dallas L. Salisbury......... 46
Enoff Associates, Sykesville, MD, Louis D. Enoff................. 70
SUBMISSIONS FOR THE RECORD
Lowry, David B., Portland, OR, letter............................ 83
Retired Public Employees Association, Inc., Albany, NY, Cynthia
Wilson, statement.............................................. 83
Richard Weede Photography, Escondido, CA, Richard Weede, letter.. 84
SOCIAL SECURITY'S GOALS AND CRITERIA FOR ASSESSING REFORMS
THURSDAY, MARCH 25, 1999
House of Representatives,
Committee on Ways and Means,
Subcommittee on Social Security,
The Subcommittee met, pursuant to notice, at 10 a.m., in
room 1100, Longworth House Office Building, Hon. E. Clay Shaw,
Jr. (Chairman of the Subcommittee), presiding.
[The advisory announcing the hearing follows:]
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SOCIAL SECURITY
FOR IMMEDIATE RELEASE CONTACT: (202) 225-9263
Date March 18, 1999
Shaw Announces Hearing on
Social Security's Goals and Criteria for
Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on
Social Security of the Committee on Ways and Means, today announced
that the Subcommittee will hold a hearing on the Social Security
program's goals and criteria for assessing reform proposals.The hearing
will take place on Thursday, March 25, 1999, in the main Committee
hearing room, 1100 Longworth House Office Building, beginning at 10:00
Oral testimony at this hearing will be from invited witnesses only.
Witnesses will include representatives of the U.S. General Accounting
Office and the Social Security Administration Office of the Actuary,
and other program and pension experts. However, any individual or
organization not scheduled for an oral appearance may submit a written
statement for consideration by the Committee and for inclusion in the
printed record of the hearing.
Despite its remarkable success in combating poverty among the
elderly, Social Security faces increasing hurdles in paying promised
benefits in the coming years. As Social Security's Trustees stated in
their April 1998 report, ``Beginning with the year 2013, the tax income
projected under present law is expected to be insufficient to cover
program expenditures.'' By the year 2032, when the Trust Funds are
projected to be depleted, tax collections will cover only 72 percent of
benefit obligations. The U.S. General Accounting Office has reported
that maintaining solvency would require immediate across-the-board
benefit cuts of 14 percent or tax hikes of 16 percent. If changes are
delayed until the year 2032, benefit cuts of 45 percent or payroll tax
hikes of 25 percent or more would be required to maintain solvency.
In the face of these challenges, a number of proposals have been
made to reform Social Security's financing, benefits, or both.
Proposals vary on policy specifics, with some stressing benefit cuts,
tax increases, or some combination. More recently, some proposals,
including the reform ``framework'' offered by the President, have
suggested relying on budget surpluses to extend program solvency. In
general, reform proposals claim to reinforce Social Security's
fundamental purposes and goals, while preserving the program for future
workers and families.
As the Subcommittee assesses the impact of alternative solutions to
Social Security's financing problems, it needs to gain an appreciation
of the effects that changes to Social Security will have on the
economy, national savings, the Federal budget, and the retirement
security of every participant.
In announcing the hearing, Chairman Shaw stated: ``Social Security
impacts the lives of nearly every American and has a direct effect on
the economy and the Federal budget. Ultimately, we must decide what are
the most important criteria to use in evaluating specific proposals to
ensure Social Security's future. As we move forward, we should
constantly focus on Social Security's original goals. And by
considering reform proposals in that light, we will know whether or not
we are staying true to the vision of our parents and grandparents that
has worked so well for generations.''
FOCUS OF THE HEARING:
The Subcommittee will hear the views of a wide range of experts in
retirement policy regarding the fundamental goals of the current Social
Security program and criteria to use when evaluating options for Social
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Chairman Shaw. If the Members and our visitors could take a
seat, we will proceed.
Good Morning. A wise man once said, ``Laws and institutions
must go hand-in-hand with the progress of the human mind. As
manners and opinions change with the change of circumstances,
institutions must advance also and keep pace with the times.''
That wise man was President Thomas Jefferson. His words should
easily apply to our task of preserving and strengthening Social
As a scholar and a lawmaker, I am sure that President
Jefferson understood the need to have sound criteria for
assessing government changes and their impact. That is the
topic of our hearing today. We have a distinguished, almost
Jeffersonian, group of witnesses to help us think about how to
evaluate Social Security reform and proposals.
Many questions are on my mind as we proceed today and in
the coming weeks. How will the various proposals affect the
retirement security of all Americans, the economy, national
savings, and the Federal budget? Do certain proposals raise
taxes? Do certain proposals cut benefits; raise the retirement
age? Should we be concerned that under the President's plan
Congress would still have to vote to raise the debt ceiling in
2 years? Should we be concerned that under the President's plan
we are faced with the problem of raising taxes or cutting
benefits in 2013?
We have to analyze every plan very carefully. We shouldn't
just save Social Security for the next election. We must and
will save it for the next generation. There are just a few of
the important questions to be answered. In the end, though, we
must remain true to Social Security's original goals:
guaranteeing lifetime benefits, protecting all families--
especially low-income families--against death and disability,
and guarding against inflation.
As I have said before, our challenge is to find a way to
preserve these core features while keeping Social Security
sustainable and affordable for our children and our
grandchildren. That is a tall order, but one we can and we must
achieve. In recent weeks, we have joined together to pledge to
avoid raising taxes or cutting benefits to maintain solvency.
This week, the House and Senate will collectively agree on
reserving 100 percent of the Social Security surplus--even more
than the President--for saving Social Security and Medicare.
Hopefully, we can expand on these measures and build on the
framework the President laid out to keep the ball moving
forward in the weeks and the months ahead.
Before turning to Mr. Matsui for his opening statement, I
would like to point out something about the President's plan.
Yesterday, not a single U.S. Senator voted for President
Clinton's plan to have the government invest Social Security
dollars in the stock market. Not a single one. So, 45
Democratic Senators, each and every one of them, said that the
President's Social Security plan in that regard was wrong, and
that it was the wrong way to go.
This is a good bipartisan beginning. We must be able to
examine, in a very objective way, all proposals, no matter if
they come from the Democratic side of aisle, the Republican
side of the aisle, or from the White House.
Mr. Matsui. Thank you, Mr. Chairman. I appreciate your
holding these hearings. I do wish that we can get these same
witnesses back, and perhaps they can testify in a similar
fashion after Chairman Archer and you actually introduce your
bill. Then we can have something to make comparisons.
As you indicated, there was a vote in the Senate yesterday
on a 99-to-0 vote to prevent--or at least a precatory motion to
prevent--the President's proposal in terms of government
investment in the market from becoming law. It was kind of a
meaningless act, but, nevertheless, it did have some relevance
to it. We really need to have some comparison. Because unless
and until we have some comparison, we are basically working
pretty much in a vacuum.
I really look forward to seeing the document that you and
Chairman Archer plan to introduce. Perhaps we can have the same
kind of vetting system for that legislation as we had for the
In the meantime, I am assuming we have to deal with the
Feldstein plan. I keep hearing rumors that the Feldstein plan
is the one that the plan that you and Chairman Archer plan to
introduce is based upon. Perhaps we can enter into that debate
I might just point out that there are essentially four
matters that we have to look at with respect to any reform
proposal: one, the degree to which it increases national
savings; two, the extent to which it maintains fiscal
discipline; three, the capacity that it creates for the Nation
to address other important pressing priorities; and four, its
success in preserving Social Security's fundamental social
These four criteria and the criteria that Mr. Walker talked
about, and others that people will be talking about this
morning, are very important. But, then, it really comes down to
some fundamental questions. Social Security provides a safety
net for our senior citizen population. We have estimated that
today anywhere from 35 to 50 percent of the seniors would be in
poverty without Social Security. In addition to that, it
provides a safety net in case the breadwinner in a family
should die. The surviving spouse and the children will have, at
least, some minimum level of sustenance, should that occur.
Social Security pays for that. Also, if the breadwinner becomes
disabled, a family is able to at least get by with Social
Security benefits through the disability payment system.
Disability and survivors benefits are about one-third of the
entire Social Security payout.
Any system would have to take into consideration those
factors, as well as the four or five criteria that the Chairman
mentioned. Mr. Walker, I think, has 6 or 7 or maybe up to 10,
and the four that I mentioned as well. I hope these issues are
adequately addressed. Perhaps as the speakers testify and
critique the President's plan, they perhaps will critique the
Feldstein plan as well, in fairness to this particular process.
Unless we see this in comparison, we really won't know how to
address this fundamental issue.
We all realize that we do want to deal with Social Security
this year. Although time is running short, I understand that
Chairman Archer and Mr. Shaw plan to introduce a bill. I hope
it is, as they say, sometime before May. The calendar year is
moving. We are starting to work on our appropriations bill. We
will pass, presumably, a budget today. Once we get into the
appropriations process, it is really hard to focus the mind on
something as big and as significant as Social Security, that
affects almost every family in America.
I look forward to this. I look forward to working with
those helping to, at least, discuss and develop standards and
criteria. On the other hand, I would hope that when the plan
offered by the two Chairs is before us, we have the same kind
of opportunity to review those plans as well. Thank you.
Chairman Shaw. Bob, I would just like to clear one thing
up. I, too, am hopeful that there will be a plan in place for
this Subcommittee to start studying before the end of next
month. I would also invite you and the Democrats to put forth a
plan and we will give you the same courtesy, I can assure you.
Or we invite you to examine whatever plan we might come up
with. Hopefully, we can get together in a bipartisan manner.
I think these things are starting to evolve. I think people
are beginning to realize--I think the American people are very,
very aware of what we are doing. I think today we can say the
third rail of politics is for Congress to do nothing. I think
that would be the tragedy of this Congress.
I intend to aggressively put forward--and work toward a
Social Security plan that I am confident will be in place, not
only for our children, but also for our grandchildren. I
welcome you to join with us.
Mr. Matsui. I appreciate this. If the Chair would yield to
me for just a moment, I don't want to prolong this debate. We
do want to hear from our witnesses.
Chairman Shaw. I am not debating.
Mr. Matsui. Well, it sounds to me that there was a little
challenge in that. But that is OK. I am really looking forward
to the Chair and, again, Chairman Archer's proposal. I think we
spent the last 3 months--90 days, believe it or not--critiquing
the President; now about 30 hours of hearings just criticizing
the President's proposal. It, surprisingly, has stood up pretty
well, in spite of all those criticisms. Now we need to see some
other proposals out there. It is just a question of maybe a
little leadership; you know, rolling up our sleeves and sitting
down and seeing if we can come up with something. We need to
see a proposal. I appreciate the fact the you are going to try
and get one before the end of the month. I hope that time
doesn't slip, because we really are running out of time.
Chairman Shaw. Does the President really have a proposal
that is out there? I know he has thrown out a couple of ideas.
Is he going to bring a bill to us or a complete proposal?
Mr. Matsui. There will be a bill. It is more than a couple
of ideas. I think we all know that. We would not have spent 30
hours on it if it was just a couple of ideas. We have spent a
lot time on the President's proposal.
Chairman Shaw. I want to make one thing very clear. I give
the President high marks for bringing forward the concept that
somehow in this mix we are going to have to change the
investment structure of Social Security retirement funding. He
did that. I know that it was controversial. I think that, by
his having done that, he is going to make it easier for us, on
both sides of the aisle, to bring a plan forward that won't
appear to be radical. It will appear to be sensible and will be
sensible, and will be drawn in a most careful manner. So, I do
give the President high marks for that.
I have been very careful not to trash the President and his
proposal. Every time I do make some comment that isn't
altogether with the President, I am always very careful to
point out that he has opened the debate on investment in the
private sector, which I feel is an important contribution to
Mr. Matsui. And I would say, Chairman Shaw, I agree. You
have been very, very even-handed in your comments and critique
of the President's proposal. Not all of your Members on your
side of the aisle have, but at least you have. I thought and
feel you have been reasonably restrained. So, I appreciate
Chairman Shaw. I thank you and hope you feel that way at
the end of the debate, and if and when we are joined in hands,
hopefully, in going forward with a proposal that I think all of
us can embrace.
For our first witness this morning, we have Hon. David
Walker, who is Comptroller General of the United States. He is
no stranger to this Subcommittee and it is a pleasure to
welcome you back. Mr. Walker.
STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S.
GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you, Mr. Chairman and Members of the
Subcommittee. I would ask that my full statement be entered
into the record.
Chairman Shaw. Without objection, the full statements of
all the witnesses today will be placed in the record. The
Subcommittee would invite each witness to summarize. Thank you.
Mr. Walker. I appreciate, Mr. Chairman, the opportunity to
come back before this Subcommittee in the ongoing discussion on
how best to ensure the long-term viability of the Social
As you know, Social Security forms the foundation of our
retirement income system. In looking at reform, we need to
consider that it provides benefits that are critical to the
well-being of millions of Americans. A wide array of proposals
have been put forth to restore this program's solvency. The
Congress will need to determine which proposals best reflect
our country's goals for this important national program.
Today, I would like to provide an analytic framework for
assessing any proposal that might be put forth. I would like to
begin by discussing the purpose of the Social Security system;
the role that the program currently plays and certain criteria
and questions that should be considered in assessing any reform
proposal. I would like to, then, talk about certain other
elements, including appropriate benchmarks that are necessary
to compare any reform proposal, too.
Mr. Chairman, we have to keep in mind that the current
Social Security program has certain promised benefits, but
those promised benefits are not adequately funded. Therefore,
in comparing any particular reform proposal, in fairness, we
need to make sure we are comparing apples to apples--not
unfunded benefits--as the basis for doing all the comparisons.
My statement today is based on work that GAO has already
done and work that we have ongoing for this Subcommittee. I do
not take any position, nor does GAO, on any particular element
or any particular proposal. That would be inappropriate.
Candidly, what we are trying to do, Mr. Chairman, is to try to
help the Congress by providing a framework for moving forward
to get action, hopefully, in this Congress on this important
While there are many reform proposals with a wide range of
features and options, all proposals to restore long-term
solvency involve some combination of modifying benefits,
raising revenues, or capturing increased returns from investing
contributions. We will face many difficult choices in making
Social Security not only solvent, but sustainable over the long
term. Our strong economy gives us a historic opportunity to
address this problem.
Focusing on comprehensive packages of reforms that protect
the benefits of current retirees while achieving a balance of
equity and adequacy for future beneficiaries will help us to
foster credibility and acceptance. This is the best way to meet
our obligations and achieve the overarching goal that we seek,
which is to ensure the retirement income security of not only
current, but future generations of Americans.
I am going to skip, now, several things in my testimony,
Mr. Chairman. I think the first thing we have to recognize is
the importance of Social Security as the foundation of
retirement security. In my testimony, under figure 1, we talk
about the percentage of benefits that Social Security
represents for many Americans. All too many Americans rely upon
Social Security as their primary or sole means of retirement.
We note in figure 2, the tremendous job that Social Security
has done in helping to contribute to reduce poverty rates among
the elderly. We talk about the declining ratio of workers to
retirees in figure 3, which is the demographic problem that we
face. In figure 4, we note the difference between the projected
OASDI income and the cost rates, which illustrates the
financing imbalance that we face in this program.
Having looked at the background information, which I would
commend to you, I think it is important now to look forward.
Over the course of the last several years, various reform
proposals have been crafted with specific goals in mind,
articulated in terms of solvency, economy, individual equity,
and income adequacy. Two primary criteria have been used to
evaluate these proposals: the extent to which they achieve
sustainable solvency and what their effect would be on the
economy and the budget, and the balance that they strike
between the twin goals of individual equity and income
These are two important elements, but I would add a third:
the details. The details do matter. That is, how would such
changes be implemented, administered, and explained to the
public? That is a critical third dimension that, I believe,
must be addressed in connection with any Social Security reform
With regard to the first element, crafting a sustainable
solution to Social Security's financing problem involves more
than ensuring long-range actuarial balance, although actuarial
balance is a goal that we should achieve. It also means making
sure that the program is sustainable into the future, and that
we deal with the so-called ``cliff effect'', where as time
passes, each year that is eliminated is a ``good year''--a
surplus year for Social Security--and is replaced at the 75th
year with a big deficit year. So, we are taking off a good one
and adding a bad one every year. Figure 6 graphically
demonstrates that in a fashion that, I think, should be
The second element is balancing equity and adequacy in the
benefit structure. The current Social Security system's benefit
structure is designed to address the twin goals of individual
equity and retirement income adequacy. Differences in how
various proposals balance these competing goals will help
determine which proposals will be acceptable to policymakers
and the public. To restore solvency only via changes to current
benefits or payroll taxes would reduce the implicit rates of
return that future cohorts or beneficiaries will receive on
their contributions. This would serve to reduce individual
equity, and depending upon which exact measures are taken, to
compromise adequacy as well.
The third element--implementation, administration, and
public understanding--forms another important area to consider.
Although some consider these issues merely technical or
routine, compared with macroeconomic or other policy concerns
associated with benefit adequacy and financing, implementation
and administration issues are important. They have the
potential to delay, if not derail, reform if they are not
adequately considered and properly planned. Moreover, such
issues can influence policy choices, both as to feasibility and
cost. As a result, they should be integral factors in the
ultimate decisions regarding the Social Security program.
In addition, potential transparency and public education
needs associated with various reform proposals should be
considered. Reforms that are not well understood could face
difficulties in achieving broad-based acceptance and support.
Regardless of the reform proposal being considered, there will
also be a need for enhanced public education. While any changes
to the Social Security program must be explained to the public,
the need would be especially acute if individual accounts were
a feature of the chosen reform package. Public understanding
may not necessarily bring about public acceptance of Social
Security reform, but the credibility of any reform package will
be enhanced to the extent that the American public understands
the changes being made and the impact that these changes will
have on their personal retirement planning.
In conclusion, Mr. Chairman and Members of the
Subcommittee, restoring solvency to the Social Security system
is a formidable challenge. Addressing it in a sustainable
fashion today could help us to avoid similar challenges in the
future, rather than leaving difficult choices for our children.
The health of our economy and the projected budget surpluses
offer us a historic opportunity to meet these challenges from a
position of financial and economic strength. Such good fortune
can, indeed, help us to meet our historic responsibility--and
our fiduciary obligation, if you will--to leave our Nation's
future generations a financially sustainable and sound system.
We must also move forward to address Social Security
because we have other equally serious and, in fact, more
challenging issues to address, namely, healthcare financing.
Reforming Social Security will be easy lifting as compared to
reforming Medicare. It is critically important that we get on
with Social Security because that is a solvable problem.
We have offered three basic criteria to use in considering
reform proposals. I would commend to the Members a series of
questions that are attached as an exhibit, key questions which
we believe should be asked about every reform proposal in order
to have a common foundation to analyze the pros and cons.
Obviously, different Members will feel that different questions
are more important than others. In the end, we believe it is
critically important to consider reform proposals as a package.
We are very concerned that a tremendous amount of time and
attention is placed on debating single elements, rather than
looking at comprehensive packages.
We believe it is critically important to have a framework
to analyze comprehensive packages because, as you know, there
are tradeoffs in packages. In many cases there are interactive
effects of individual elements, and some can serve to smooth
some of the hard edges associated with those elements.
We believe, Mr. Chairman, that it is possible for this
Congress to exceed the expectations of all generations of
Americans in conjunction with Social Security reform. Why do I
say that? Because the people that are most concerned about
Social Security reform are today's elderly and near-retirees.
From a practical standpoint, most reform proposals talk
about doing little or nothing to affect their benefits. At the
same point in time, baby boomers such as myself and Generation
Xers, such as my children, don't have a high degree of
confidence in the current system. They are discounting their
benefits under the system to a great degree. Therefore, by
reforming Social Security in a prudent manner and on a timely
basis, it is possible to exceed the expectations of all
generations of Americans.
Mr. Chairman, the GAO and I stand ready to help this
Congress move forward in this important area. Hopefully, this
framework for consideration by the Congress in evaluating all
reform proposals will prove to helpful. Thank you, Mr.
[The prepared statement and attachments follow:]
Statement of David M. Walker, Comptroller General, U.S. General
Thank you for inviting me here today to continue the
ongoing discussion on how best to ensure the long-term
viability of our nation's Social Security program.\1\ According
to the OASDI Trustees' 1998 mid-range estimates, the program's
cash flow is projected to turn negative in 2013. In addition,
all of the accumulated Treasury obligations held by the Trust
Funds are projected to be exhausted by 2032. The financing
problems facing Social Security pose significant policy
challenges that should be addressed soon in order to lessen the
need for more dramatic reforms later.
\1\ Social Security refers here to the Old-Age, Survivors, and
Disability Insurance program, or OASDI.
Social Security forms the foundation for our retirement
income system and, in so doing, provides benefits that are
critical to the well-being of millions of Americans. A wide
array of proposals have been put forth to restore this
program's solvency, and the Congress will need to determine
which proposals best reflect our country's goals for a
retirement income program. Today, I would like to provide an
analytic framework for assessing these proposals. I would like
to begin by discussing the purpose of the Social Security
system. The role that we envision for the program will be vital
in deciding which proposals to adopt. Next, in response to your
invitation to me to appear at this hearing, I would like to
offer what I believe are the basic criteria for assessing
reform proposals. I would then like to stress that the Congress
needs to compare reform proposal packages. If we focus on the
pros and cons of each element of reform, we will get mired in
the details and lose sight of important interactive effects. It
will also be more difficult to build the bridges necessary to
achieve consensus. Finally, I want to point out the importance
of establishing the proper benchmarks against which reforms
must be measured. Often reform proposals are compared to
current promised benefits, but this benchmark, while in some
ways valid, has some drawbacks. Currently promised benefits are
not fully financed, and so it might be necessary to use a
benchmark of a fully financed system to fairly evaluate reform
My comments today are based largely on a body of work we
have published as well as on ongoing work for this Committee.
It is not my intention to take a position for or against any
individual reform proposal or elements. Rather, my testimony is
designed to help clarify the debate on various proposals to
help the Congress move forward in addressing this important
national debate. In choosing among proposals, policymakers
should consider three basic criteria:
the extent to which the proposal achieves
sustainable solvency and how the proposal would affect the
economy and the federal budget;
the balance struck between the twin goals of
individual equity (rates of return on individual contributions)
and income adequacy (level and certainty of benefits); and
how readily such changes could be implemented,
administered, and explained to the public.
While there are many reform proposals with a wide range of
features and options, all proposals to restore long-term
solvency involve some combination of cutting benefits, raising
revenues, or capturing increased returns from investing
contributions. We will face many difficult choices in making
Social Security a sustainable program. But our strong economy
gives us an historic opportunity to address this problem.
Focusing on comprehensive packages of reforms that protect the
benefits of current retirees while achieving the right balance
of equity and adequacy for future beneficiaries will help us to
foster credibility and acceptance. This is the best way to meet
our obligations and achieve overarching goal that we all seek--
that is, ensuring the retirement income security of current and
Difficult Choices Are Necessary To Restore Social Security's Solvency
In the past few years, as attention has focused on Social
Security's future financial situation, a wide array of
proposals have been put forth. Some reduce benefits, some raise
revenues; most propose some combination to restore financial
solvency. The more traditional reforms seek to preserve the
program's structure, restoring solvency through adjusting
benefit and revenue provisions; others would restructure the
system by allowing workers to fund at least some portion of
their benefits through individual accounts. Regardless of
structure, many proposals rely on capturing increased returns
from market investments. In evaluating these proposals, it is
important to understand Social Security's fundamental role in
ensuring the income security of our nation's elderly and the
nature, timing and extent of the financing problem.\2\
\2\ For a discussion, see Social Security: Different Approaches for
Addressing Program Solvency (GAO/HEHS-98-33, July 22, 1998).
Social Security Is the Foundation of Our Nation's Retirement
Social Security has long served as the foundation of our
nation's retirement income system, which has traditionally been
comprised of three parts: Social Security, employer-sponsored
pensions (both public and private), and personal savings.\3\
Social Security provides a floor of income protection that the
voluntary forms of employer pensions and individual savings can
build on to provide a secure retirement. However, private
pension plans only cover about one-half of the full-time
workforce, and a significant portion of the American public
does not have significant personal savings. In addition, Social
Security is the sole source of retirement income for almost a
fifth of recipients. (See fig. 1.)
\3\ For a discussion of this traditional approach to retirement
income, see Retirement Income: Implications of Demographic Trends for
Social Security and Pension Reform (GAO/HEHS-97-81, July 11, 1997).
Given Social Security's importance as the foundation of
retirement income security, it has been a major contributor to
the dramatic reduction in poverty among the elderly population.
Since 1959, poverty rates for the elderly have fallen from
nearly 35 percent to 10.5 percent. (See fig. 2.)
Figure 2: Poverty Rates for the Elderly, 1959 to 1996
Social Security's benefit structure represents a retirement
income insurance program whereby workers pool the risks
associated with the loss of earnings due to old age,
disability, or death. It is a mandatory and almost universal
program. As a result, the vast majority of American workers
take Social Security credits with them whenever they change
jobs. Social Security also provides inflation-protected
benefits for the life of the retiree. No matter how long they
live, retirees will continue to receive Social Security
benefits uneroded by inflation. The program, which provides
benefits not generally available as a package in the private
market, includes benefits for retired workers, their spouses
and dependents, and their survivors as well as for those who
The Financing Problem Needs to Be Addressed Now
The Congress has always taken the actions necessary to
ensure Social Security's future solvency when faced with an
immediate solvency crisis. These actions have generally been
adjustments to the benefit and revenue provisions of the
program. Today, the program does not face an immediate crisis;
rather, it faces a long-range and more fundamental financing
problem due to demographic trends. While the crisis is not
immediate, it is important to act soon if we are to avoid
having to unfairly burden future generations with the program's
rising costs and give these individuals time to make necessary
adjustments to their retirement planning.
Social Security's financial condition is directly affected
by the relative size of the populations of covered workers and
beneficiaries. Historically, this relationship has been
favorable, but a major reason we are debating Social Security's
financing today is that the covered worker-to-retiree ratio and
other demographic factors--in particular, life expectancy--have
changed in ways that threaten the financial solvency and
sustainability of this important national program. (See fig.
Figure 3: Ratio of Workers to Beneficiaries
Thus, while the program was put in 75-year actuarial
balance just 15 years ago, Trust Fund balances now are
projected to be exhausted in 2032. In addition, the program
will begin to experience a negative cash flow in 2013, which
will accelerate over time. (See fig. 4.) Absent meaningful
program reform, this will place increased pressure on the
federal budget to raise the resources necessary to meet the
program's ongoing costs. To restore the 75-year actuarial
balance to the program today, we would need to immediately
increase annual program revenues by 16 percent or reduce annual
benefit payments by 14 percent across the board.
Figure 4: Social Security Income and Cost Rates
Another way to understand the magnitude of the problem is
to consider what the system will cost as a percentage of
taxable payroll in the future. Consider what would happen if we
did nothing and let the Trust Funds be exhausted in 2032, as
estimated in the 1998 Trustees' report. It would then be
necessary to find resources in the following year that would be
more than 37 percent higher than the revenues projected to be
available under the 12.4 percent payroll tax that currently
finances the system. (See fig. 5.) Alternatively, we would have
to reduce benefits in the year following Trust Fund exhaustion
by 27 percent. Clearly, we must act soon in order to minimize
the needed changes and maximize the fairness to future
Figure 5: Changes Needed to Maintain Solvency--Proposals Rely
on Different Benefit Adjustments and Financing Arrangements
A variety of proposals have been offered to address Social
Security's financial problems. Some would reduce benefits by
modifying the benefit formula (such as increasing the number of
years used to calculate benefits), reducing cost-of-living
adjustments (COLA), raising the normal and/or early retirement
ages, or revising dependent benefits. Others have proposed
revenue increases, including raising the payroll tax that
finances the system; increasing the taxation of benefits; or
covering those few remaining workers not currently required to
participate in Social Security, such as older state and local
government employees. A number of proposals would incorporate
investment returns to increase revenues and to reduce benefit
cuts, or tax increases that would otherwise be required, or
In fact, almost all proposals combine benefit reductions
and changes designed to gain increased investment returns. The
proposals differ not only with regard to specific benefit
changes but also in how investment returns are captured. Some
would change the Trust Fund's investment policy so that the
government could purchase equities or other instruments besides
Treasury securities; others would restructure the Social
Security system so that participants could invest at least part
of their own contributions. The latter approach creates
individual accounts as a means to finance and accumulate future
benefits, rather than relying entirely on payroll tax financing
through a centrally managed government trust fund account.
These proposals also differ in how such increased returns
would be financed. Some would use a portion of current payroll
tax collections--a ``carve-out'' from the Trust Fund--while
others would ``add-on'' federal budget surpluses (that is,
general revenues) or additional payroll taxes as a means to
finance either current benefits or individual accounts. These
choices carry with them implications for individual
beneficiaries, the Social Security program, the federal budget,
and the national economy. Such implications should be well
understood before a policy choice is made.
Choosing Among Reform Proposals
Proposals that restore solvency to Social Security
necessarily combine several or even a multitude of changes to
the program. Although these changes are presented in a
comprehensive package, debate often focuses on individual
aspects that, on their own, are undesirable. For example, many
criticize proposals to raise the normal retirement age without
considering the other, potentially offsetting elements of the
proposals of which this change would be a part. Although such
criticisms are legitimate and can contribute to the public
debate, it is critically important to evaluate the effects of
an entire package before considering whether these proposed
changes add up to acceptable program reform. If a comprehensive
package of reforms meets policymakers' most important goals for
Social Security, individual elements of the package may be more
acceptable. After all, individual reform elements can drive
interactive effects that can tend to smooth the rough edges of
the individual elements. In addition, it's important to look at
a complete puzzle before rendering final judgments and
understand how it would stand up against relevant reform
criteria. For example, phasing in an increased normal
retirement age coupled with adding individual accounts could
result in more flexibility and benefit levels for baby boomers
and generation Xers compared with the current system.
Evaluating such packages can be complex, however. What
factors or elements should such evaluation measure? What weight
should be placed upon particular factors? I would not presume
to tell policymakers which factors or elements should prove
decisive for them in choosing among proposed reform packages. I
am, however, in a position to suggest what factors to consider
in making these choices.
Over the course of the last several years, various reform
proposals have been crafted with specific goals in mind--
articulated in terms of solvency, the economy, individual
equity, and income adequacy. Two primary criteria can be used
to evaluate these proposals: (1) the extent to which they
achieve sustainable solvency and how their effect on the
economy and the federal budget and (2) the balance they strike
between the twin goals of individual equity and income
adequacy. I would also add a third criterion, which, although
not addressing a goal of Social Security reform, focuses on the
important practical aspects of reform--that is, how readily
such changes could be implemented, administered, and explained
to the public. These elements provide a basis to address a
range of more detailed questions (see attachment 1) that help
describe and measure the potential effects of various proposals
on important policy and operational aspects of public concern.
Measuring proposals against these three criteria can help shed
light on the important choices we face; I will discuss each in
Criterion 1: Financing Sustainable Solvency
Crafting a sustainable solution to Social Security's
financing problem involves more than ensuring long-range
actuarial balance, although actuarial balance is also a goal to
be achieved. Simply taking the actions necessary to put the
Social Security system back into an exact 75-year actuarial
balance could result in having to revisit these difficult
issues again in the not-too-distant future. For example, if we
were to raise payroll taxes 2.19 percent--which, according to
the 1998 Trustees' annual report, is the amount necessary to
achieve 75-year balance--the system would be out of balance
almost immediately and the 2013 cash problem I cited earlier
would move forward only to the year 2020.
Historically, the program's solvency has generally been
measured over a 75-year projection period. If projected
revenues equal projected outlays over the 75-year time horizon,
then the system is declared in actuarial balance.
Unfortunately, this measure of solvency is highly transient and
involves what could be called a ``cliff effect.'' (See fig. 6.)
Each year, the 75-year actuarial period changes and a year with
a surplus is replaced by a new 75th year that has a significant
deficit. As a result, changes made to restore solvency only for
the 75-year period will result in future actuarial imbalances
Moreover, the problem is not one that is 74 years away
because the program will begin running annual cash deficits
long before the trust funds actually deplete their assets. Add
to this the possibility that adverse economic or demographic
conditions could accelerate the depletion of the trust funds,
and the time when the Congress would need to address the
problem moves even closer. Therefore, simply restoring 75-year
actuarial balance today could mean that the Congress would have
to visit these issues again in just 15 or 20 years. In fact,
today's debate is a testimony to this fact. About 16 years ago,
the President and the Congress thought they had saved Social
Security for current and future generations. That reform
package did save us from the brink of bankruptcy, but it did
not address the cliff effect.
Solutions that lead to sustainable solvency are those that
avoid the need to periodically revisit this difficult issue,
but they have implications for the risk borne by individuals.
To the extent that a worker's future retirement benefits are
funded in advance--in that they will depend on contributions
and the earnings (rates of return) on those contributions--the
system is at less risk of insolvency from unfavorable
demographic or economic trends. While pre-funding benefits has
obvious advantages with respect to sustainability over the
largely pay-as-you-go system currently in place, individuals
bear more risk under such an approach, and the social insurance
aspects of the program could be weakened.
Reforms that provide sustainable solvency could also have
positive effects for the economy at large. To the extent that
pre-funding worker retirement results in increased savings and
investment, the overall future economy would be larger, making
it easier for the nation to support a larger elderly
population. Simply put, if the dollar that the worker
contributes today is invested in private assets (stocks and
bonds), there is a reasonable chance that the dollar will
contribute to a growing economy. The dollar invested will grow
in value and provide a return to the owner of the asset. Thus,
investment returns will, in general, help us finance a given
benefit in the future more cheaply (that is, with less
expenditure today) than the way we currently finance Social
How the measures to achieve solvency are financed can have
important implications for the federal budget and the national
economy. In addition, federal fiscal policy itself can be an
important element in fostering economic growth. Our work on the
long-term fiscal outlook shows that replacing deficits with
surpluses increases national income over the next 50 years,
thereby making it easier for the nation to meet future needs
and commitments. Thus, it is important to consider the
interaction of federal fiscal policy with measures to restore
program solvency in laying a foundation for a sustainable
Social Security program. For example, proposals using budget
surpluses to fund individual accounts, to purchase private
stocks or bonds for the trust fund, or reduce publicly held
debt would all have some positive effects on national saving
and economic growth. Yet, considerable debate exists over the
relative extent of the economic benefits under these different
alternatives. Using the projected budget surpluses to reduce
publicly held debt alone would indirectly make the Social
Security system more sustainable but would not reform or
restructure the existing program. I have discussed this at
greater length before this Committee several weeks ago in the
context of the President's budget proposals.\4\
\4\ See Social Security and Surpluses: GAO's Perspective on the
President's Proposals (GAO/T-AIMD/HEHS-99-96, Feb. 23, 1999).
Furthermore, some proposals must finance what most analysts
call ``transition costs,'' and how these are financed matters
as well. When proposals incorporate some degree of pre-
funding--either via individual accounts or through the current
program structure--current workers would, in effect, contribute
both to their own accounts and pay for the benefits of current
retirees under the existing defined benefit program. The
resulting incremental transition costs must be financed. If
transition costs are financed by borrowing or with projected
budget surpluses, the effects on Social Security participants
would be mitigated, but the positive effects of pre-funding on
national saving could be neutralized in the near term by
additional public borrowing.
Sustainable solvency is an important criterion in assessing
reform proposals but may require trade-offs between short-run
and long-run gains. Further, it is not the only criterion by
which to evaluate reform proposals. The economic and financing
considerations that achieve sustainable solvency should be
measured against equity and adequacy concerns as well.
Criterion 2: Balancing Equity and Adequacy in the Benefit
The current Social Security system's benefit structure is
designed to address the twin goals of individual equity and
retirement income adequacy. Individual equity means that there
should be some relationship between contributions made and
benefits received (that is, rates of return on individual
contributions). Retirement income adequacy is addressed by
providing proportionately larger benefits to lower earners and
certain household types, such as those with dependents (that
is, a progressive and targeted benefit structure). Virtually
all reform proposals address the concept of income adequacy,
but some place a different emphasis on it relative to the goal
of individual equity. Differences in how various proposals
balance these competing goals will help determine which
proposals will be acceptable to policymakers and the public.
Policymakers could assess this balance by considering the
extent to which proposals address the following concerns:
--Adequacy: (1) adequate benefit levels to protect the
elderly from poverty and (2) higher replacement rates for
--Equity: (1) reasonable returns on contributions, (2)
improved intergenerational equity, and (3) increased individual
choice and control.
The weight individual policymakers may place on different
concerns would vary, depending on how they value different
attributes. For example, if offering individual choice and
control is less important than maintaining replacement rates
for lower income workers, then reform proposals emphasizing
adequacy considerations might be preferred.
Each proposal for reform will have an impact on individuals
and families, whether limited to changes within the current
program's structure or whether some portion of the program's
financial gap is to be closed through access to equity markets.
To restore solvency only via changes to current benefits or
current payroll tax revenues reduces the implicit rate of
return that future cohorts of beneficiaries will receive on
their contributions. (See fig. 7.) This serves to reduce
individual equity and, depending on what exact measures are
taken, could compromise adequacy as well. To preserve the
existing protections and income adequacy for certain types of
beneficiaries under this approach, it could be necessary to
reduce the benefits of other types of beneficiaries. To avoid
such a result, payroll taxes (or the maximum taxable ceiling)
might be raised, but this could make current or future workers
worse off. Adding the prospect of additional earnings to the
system, either from market investment returns or from some
other external source, could boost individual equity while
reducing the necessity for other changes to the program,
depending on how the investment returns or other revenues are
In considering this balance, it helps to understand that
Social Security is currently structured as a defined benefit
program and that restructuring this program to include
individual accounts would add, in effect, a defined
contribution element to the system. Under Social Security,
workers' retirement benefits are based on lifetime records of
earnings, not directly on the payroll taxes they contributed.
Based on the current design of the Social Security program and
known demographic trends, the rate of return most individuals
will receive on their contributions is declining. In addition,
as noted previously, current promised benefits are not
adequately funded over the 75-year projection period.
Alternatively, those who propose individual accounts as
part of the financing solution emphasize the potential benefits
of a defined contribution structure as an element of the Social
Security program or financing reform. This approach to Social
Security focuses on directly linking a portion of worker
contributions to the retirement benefits that will be received.
Worker contributions are invested in financial assets and earn
market returns; the accumulations in these accounts can then be
used to provide income in retirement.
Under this approach, individual workers have more control
over the account and more choice in how the account is
invested. This control might enable individuals to earn a
higher rate of return on their contributions than under current
law. But, of course, these opportunities for higher returns
exist because the investor assumes some measure of risk that
the return expected may not actually be realized.
Some reform proposals incorporating individual accounts
address the need for protecting individuals and ensuring income
adequacy by combining the defined contribution and defined
benefit approaches into a two-tiered structure for Social
Security. Under such a structure, individuals would receive a
base defined-benefit amount with a progressive benefit formula
and a supplemental defined-contribution account benefit. The
benefit that would be earned through individual account
accumulations would either be added to a restructured defined
benefit amount (that is, supplement) or subtracted, in whole or
in part, from the benefits that would otherwise be provided
through Social Security's defined benefit structure (that is,
offset). Either approach could require redesigning the benefit
structure to ensure the types of protections currently provided
by Social Security. Such a structure could include a modified
version of the current defined benefit program or could
incorporate various types of guarantees based on the current or
some alternative benefit structure. Such guarantees would,
however, create contingent liabilities and incremental costs
for the government.
Clearly, the number of proposals and features can make it
difficult to sort out exactly what should be done and what
effects various actions would have on individuals and families,
although such effects may represent the most important
considerations in evaluating reform. It is critical, therefore,
that the extent to which proposals achieve solvency--admittedly
an easier criterion to measure--not overshadow the balance of
equity and adequacy.
Criterion 3: Implementing and Administering Proposed Reforms
Implementation, administration, and public understanding
form a third important area to consider. Although some consider
these issues merely technical or routine compared with
macroeconomic considerations or concerns about benefit
adequacy, implementation and administration issues are
important because they have the potential to delay--if not
derail--reform if they are not considered early enough for
planning purposes. Moreover, such issues can influence policy
choices--feasibility and cost should be integral factors in the
ultimate decisions regarding the Social Security program. In
addition, potential transparency and public education needs
associated with various proposals should be considered. Reforms
that are not well understood could face difficulties in
achieving broad public acceptance and support.
Feasibility of Implementation and Administration
Degrees of implementation and administrative complexity
arise in virtually all proposed reforms to Social Security. The
extent to which these issues present true challenges varies
with the degree to which reform proposals step away from
current practices. Hence, proposals that would make changes to
revenues or to benefits without restructuring the current
defined benefit structure of the program are less difficult to
implement and less costly to administer than those that would
create new tiers of benefits or of beneficiaries. For example,
reducing COLAs, either by improving the accuracy of the
calculation or by limiting COLA increases directly (such as by
capping, delaying, or eliminating the COLA) would not require
significant administrative change. Similarly, raising the
retirement age, in effect a recalculation of benefits, would
not represent a large increase in ongoing administrative costs,
although some implementation costs would accrue and would
include the costs of educating the public about the changing
rules. Both these changes, however, would have a ripple effect
on certain private sector pension and saving plans that are
integrated with the benefits provided under Social Security. If
the private sector plan formulas are not adjusted, these
changes would result in additional benefit costs under the
private sector plans. Alternatively, to the extent that private
sector employers act to adapt their pensions to an altered
Social Security benefit, these actions represent private
administrative costs as yet unmeasured.
Allowing the government to invest surplus Social Security
funds would raise certain implementation issues, the most
significant of which are investment vehicle and security
selection and shareholder voting rights; relatively less
significant concerns regarding cost or complexity would be
raised. However, these issues could prove controversial to
resolve because critics have expressed concern about increased
government involvement in financial markets and corporate
\5\ Social Security Financing: Implications of Government Stock
Investing for the Trust Fund, the Federal Budget, and the Economy,
(GAO/AIMD/HEHS-98-74, Apr. 1998).
But there may be ways that we can alleviate some of the
concerns about government investing. One way would be to
introduce master trust principles for collective investment of
base defined-benefit or individual account funds, which would
be separate from other government funds. In this regard, we
might be able to replicate or piggyback on a model that seems
to be working well for federal workers--the Federal Thrift
Savings Plan. These existing vehicles might help us limit
concerns about the potential for political manipulation of
investment decisions and thus foster the credibility needed to
build bridges to consensus on reforms.
The greatest potential implementation and administrative
challenges are associated with proposals that would create
individual accounts. Not all proposals for individual accounts
clearly delineate how these accounts would be administered, but
those that do vary in three key areas:
--the management of the information and money flow needed
to maintain a system of individual accounts,
--the degree of choice and flexibility individuals would
have over investment options and access to their accounts, and
--the mechanisms that would be used to pay out benefits
Decisions in these areas could have a direct effect on
system complexity and who would bear the costs and additional
responsibilities of an individual account system as well as on
the adequacy and certainty of retirement income for future
retirees. Table 1 provides a snapshot of some of the
administrative functions that would accompany any system of
individual accounts, the critical decisions associated with
each function, and a partial list of the options that could be
Table 1:--Design and Administration Issues
Critical Decision Options to
Administrative Function or Trade-Off Consider
Managing the flow of information Centralized or --Build on current
and money. decentralized Social Security
recordkeeping. tax and payroll
Choosing investment options..... Maximizing --Offer a small
individual choice set of indexed
or minimizing funds.
risk. --Offer a broad
--Combine the two
balance before a
broader range of
Paying retirement benefits...... Maximizing --Require lifetime
individual choice annuities.
or ensuring --Make annuities
preservation of voluntary, and
retirement permit lump sum
benefits. and gradual
--Combine the two
ensure at least a
for remainder of
Essentially, most decisions about the design of a system of
individual accounts amounts to trade-offs between individual
choice and flexibility and simplicity and standardization. For
example, a centralized recordkeeping system, managed by
government, could take advantage of existing systems and
economies of scale but would not offer the wider range of
alternatives for individuals that a decentralized system would.
A system of individual accounts that permitted participants
full and unfettered choice of investments would offer an
ability to maximize returns but with attendant risk that
incomes would not be adequate. Alternatively, a more
centralized investment program, with fewer available choices,
would be less administratively complex and would protect
participants from poor investment selection; but it would also
raise the risk that investment decisions could become
politicized, depending on the extent of the government's role
in selecting investment funds and fund managers. Flexibility in
how funds are withdrawn could allow individuals choice in how
to manage their own funds but creates administrative complexity
and risks leaving diminished capital to support an adequate
income throughout retirement. A full assessment of the
implications of these trade-offs will be essential to the
debate on whether and how to implement individual accounts.
Costs of Implementation and Administration
Although there are costs associated with most Social
Security reform proposals, debate has focused largely and
correctly on the costs of proposals that involve restructuring
for two reasons. First, administrative costs of changes within
Social Security's current structure could be relatively
insignificant, and adding individual accounts to the structure
creates the potential for much higher implementation and
administrative costs. For example, there could be substantial
start-up costs associated with an individual account system.
Second, the risk of higher administrative costs of individual
accounts would be borne by individual account holders, directly
affecting their benefits. Many have expressed concerns about
the administrative costs of individual accounts and how these
costs would affect accumulations, especially for the small-
account holder. Each of the reform decisions discussed here
today can have a significant effect on the costs of managing
and administering individual accounts, and it will be important
to consider their effect on the preservation of retirement
Administrative costs would depend on the design choices
that were made. The more flexibility allowed, the more services
provided to the investor; the more investment options provided,
the higher the administrative costs would be. For example,
offering investors the option to shift assets frequently from
one investment vehicle to another or offering a toll-free 1-800
number for a range of customer investment and education
services could significantly increase administrative costs. In
addition to decisions that affect the level of administrative
costs, other factors would need to be carefully considered,
such as who would bear the costs and how they would be
distributed among large and small accounts.
To some extent, however, the creation of individual
accounts could help ease administrative burdens in the future.
They would represent an infrastructure that could allow workers
to build up additional savings to meet future retirement income
and health care cost needs without significant additional
implementation and administrative costs. For example, workers
not covered by a private pension could choose to contribute
more to their individual accounts to augment their retirement
savings. Workers might also contribute more to their accounts
to help pay health care costs after they retire. The accounts
could thereby contribute to overall retirement security, not
just retirement income security.
Regardless of the reform proposal being considered, there
will be a need for enhanced public education and information.
This effort would not focus on educating the public about
choices for Social Security reform; that process began some
time ago under congressional and presidential leadership and
has raised public consciousness not only regarding Social
Security's financing problems but also of the choices we face.
Instead, enhanced education and information would serve to
explain what changes have been adopted so that participants can
adjust their retirement planning accordingly. Retirement
planning is, in its nature, a long-term process, and we must
give Americans not only the time to adapt their plans to a
reformed Social Security program but also the information
necessary to do so.
While any change to the Social Security program must be
explained to the public, the need would be especially acute if
individual accounts were a feature of the chosen reform
package. Not only would participants need to be informed of
this change, they would also require investor education,
especially if individual accounts were mandatory. For example,
individuals would need information on basic investment
principles, the risks associated with available choices, and
the effect of choosing among alternatives offered for
annuitizing or otherwise withdrawing or borrowing accumulations
from the accounts. This would be especially important for
individuals who are unfamiliar with making investment choices,
including those with lower incomes and less education, who may
have limited investing experience.
Public understanding may not necessarily bring about public
acceptance of Social Security reform. But the credibility of
any reform package will be enhanced to the extent that the
American public understands the changes being made and the
impact these changes have on their personal retirement
Restoring solvency to the Social Security system is a
formidable challenge. Addressing it in a sustainable fashion
today could help us avoid similar challenges in the future
rather than leaving difficult choices for our children. The
health of our economy and projected budget surpluses offer an
historic opportunity to meet these challenges from a position
of financial and economic strength. Such good fortune can
indeed help us meet our historic responsibility--a fiduciary
obligation, if you will--to leave our nation's future
generations a financially stable system. We must also move
forward to address Social Security because we have other,
equally serious obligations before us--compared to addressing
the health-care financing problem, reforming Social Security is
Today, I have offered three basic criteria against which
Social Security reform proposals may be measured. These may not
be the same criteria every analyst would suggest, and certainly
how policymakers weight the various elements may vary. But if
comprehensive proposals are evaluated as to (1) their financing
and economic effects, (2) their effects on individuals, and (3)
their feasibility, we will have a good foundation for devising
agreeable solutions, perhaps not in every detail, but as an
overall reform package that will meet the most important of our
I believe it is possible to reform Social Security in a way
that will exceed the expectations of all generations of
Americans. The reports about Social Security's long-term
solvency problem and the challenges it represents have caused
many Americans to have decidedly low expectations about the
future of their Social Security benefits. Many current retirees
and those nearing retirement believe that their benefits will
need to be cut to restore solvency, while some baby boomers and
many generation Xers are doubtful that the program will be
there for them when they retire. We believe it is possible to
craft a solution that will protect Social Security benefits for
the nation's current retirees, while ensuring that the system
will be there for future generations. Perhaps the answer is not
solely one approach or another--such as defined benefit versus
defined contribution. Bridging the gap between these approaches
is not beyond our ability. Doing so would represent a major
accomplishment that would benefit future generations. It would
also help to restore the public's respect for and confidence in
its government. GAO and I stand ready to provide the
information and analysis that can help the Congress meet this
challenge in a way that can exceed the expectations of all
generations of Americans.
Mr. Chairman, this concludes my remarks. I would be happy
to answer any questions you or other Members of the Committee
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ELEMENTS FOR EVALUATING SOCIAL SECURITY REFORMS
Financing Sustainable Solvency
To what extent does the proposal:
--restore 75-year actuarial balance?
--create a stable system beyond the 75-year period?
--increase national saving?
--reduce debt held by the public?
--draw on general revenues to finance changes?
--use Social Security trust fund surpluses to finance changes?
--result in a future budget deficit?
--require an increase in taxes?
--create contingent liabilities?
Balancing Adequacy and Equity
To what extent does the proposal:
--provide reasonable minimum benefits to minimize poverty among the
--provide adequate support for the disabled, dependents, and
--provide higher replacement rates for lower income workers?
--ensure that those who contribute receive benefits?
--provide a reasonable return on investment?
--expand individual choice and control?
--improve intergenerational equity?
--provide an opportunity to enhance individual wealth?
--set reasonable targets as to the percentage of the current and
projected economy and the federal budget, represented by these costs?
--provide safety valves to control future program growth?
Implementing and Administering Reforms
To what extent does the proposal:
--provide a reasonable amount of time and adequate funding for
--result in reasonable ongoing administrative costs?
--allow the general public to readily understand its financing
structure thereby increasing public confidence?
--allow the general public to readily understand the benefit
structure thereby avoiding expectation gaps?
--limit the potential for politically motivated investment
Chairman Shaw. Thank you, Mr. Walker. The questions you
refer to, I assume, are at the end of your full statement?
Mr. Walker. Yes, Mr. Chairman, that is correct.
Chairman Shaw. I would like to focus on two words in your
testimony and that is the question of ``solvency'' and
``sustainability.'' In doing so, I would call your attention to
figure 6 in your written testimony. That is the figure in which
you show the buildup of the Social Security fund until on or
about 2013, and then the decline of the Trust Fund until 2030-
something, in which it goes into the red. At what point is the
solvency of the fund affected? At which point?
Mr. Walker. Mr. Chairman, there are several key measures
and dates, I think, that have to be kept in mind. First, from a
cashflow standpoint, 2013 is the date. Starting in 2013, you
either have to increase revenues, cut benefits, or increase
debt held by the public in order to pay benefits.
Chairman Shaw. So 2013 is the critical date?
Mr. Walker. The most critical date is 2013. The year 2032
represents the date by which the Trust Fund's assets--Treasury
bonds--will be exhausted. So we believe it is important to look
at 2013, as well as 2032, but to recognize that you need to
have a reform proposal that not only achieves actuarial balance
over 75 years, but is sustainable and avoids this cliff effect
that you see in figure 6.
Chairman Shaw. Would the net effect be any different with
or without a trust fund?
Mr. Walker. The trust fund is an accounting mechanism.
Unfortunately, that is part of the public confusion. When most
people talk about a trust fund, you talk about a separate and
distinct legal entity covered by fiduciary responsibilities--
funded with hard assets--stocks, bonds, government securities
that back a stated promise. That is not what we are dealing
with here. What we are dealing with here is a budget account.
Now, the bonds that are in that account, in fairness, are
guaranteed both as to principal and interest. They are backed
by the full faith and credit of the United States government.
But it is not a trust fund as we would normally think of it,
and that is part of the public confusion, I think.
Chairman Shaw. The year 2013, that is the date that we have
got to move if we don't want to increase taxes or cut benefits.
That is the date we have to focus on, correct?
Mr. Walker. We believe that is the key date. It is not that
2032 is not important. It is. We believe that 2013 is the key
Chairman Shaw. Would you elaborate on the word
Mr. Walker. ``Sustainable'' means that we deal with the so-
called cliff effect. In 1983 after the Greenspan Commission,
the Congress enacted legislation that they thought at that
point in time was going to solve this problem. We came within
days of not being able to get the checks out on time, back
then. But part of the problem was that the reforms had this
cliff effect that Congress evidently didn't predict. You have
good years followed by progressively bad years. Therefore, when
you are looking at a rolling 75-year time, simply by moving 1
year forward, the deficit over 75 years gets worse, because you
are replacing a good year with a bad year. Sustainability means
that we need to make sure that not only do we have actuarial
balance over 75 years, but that we have actuarial balance in
year 75, such that we are not going to have to be back here in
15 to 20 years--like we are now--doing the same thing again.
You, obviously, know how difficult it is to go through this
process. I would hope that we could learn from the past and try
to make sure that the reforms that take place now don't have
this cliff effect, and not only assure solvency, but also,
Chairman Shaw. Thank you.
Mr. Matsui. Thank you, Mr. Chairman.
Mr. Walker, have you had a chance to look at Martin
Feldstein's plan? Are you familiar enough with it to comment on
some of the specifics of it?
Mr. Walker. I am somewhat familiar with it because I knew
that this was a plan that we could be asked to analyze
according to our criteria. I met with Dr. Feldstein last week
for about an hour, when he was in town, in order to try to
obtain a better understanding of it. So I am somewhat familiar
with it. But I understand that it is evolving.
Mr. Matsui. Right. Well, let me just ask you--I want to ask
you about some of the more, I guess, general concepts of the
plan. It basically would provide 2 or 3 percent of a tax
credit, up to $74,000 or $75,000--whatever our cap is at this
particular time. As a result of that, somebody making $20,000 a
year would probably end up getting about $400, if in that 2
percent situation, and somebody making $74,000 ends up getting
about $1,500-$1,800--somewhere within that range. Would that
satisfy your criteria in terms of equity?
Mr. Walker. My understanding is that, under his current
proposal, he would take about 2.3 percent of taxable payroll
and he would propose that amount come out of the unified budget
surplus. It would be allocated to individual accounts. Those
individual accounts would be invested in hard assets that would
buildup over time, which, presumably, would create an
incremental rate of return above and beyond treasury bonds, but
obviously there is some risk.
Mr. Matsui. Maybe.
Mr. Walker. That's right. Historically, based on long-term
averages, stocks have generated about 7 percent real return,
for example, as compared to 2 to 3 percent for government
bonds. Over time he is assuming that there would be a
incremental rate of return. It is also my understanding, Mr.
Matsui, that he proposes to guarantee all current benefits, and
that what would happen is that 75 percent of the buildup in
these accounts would be given back to the Social Security Trust
Fund to pay the existing defined benefit promises. Therefore,
under his proposal, people would never get less money than they
are going to get today, but they could get more money.
Now there are clearly a number of positives associated with
that, but there are a number of concerns associated with that,
too. I think that is why it is important to answer all these
questions about this proposal and every proposal.
Mr. Matsui. Well, would you say that what I just suggested,
would that fit the equity criteria?
Mr. Walker. Well, it clearly meets the adequacy.
Mr. Matsui. I'm sorry?
Mr. Walker. It clearly meets the adequacy test.
Mr. Matsui. No, I am asking just about equity.
Mr. Walker. There are several dimensions of equity. One
dimension of equity is rates of return. When I think of
equity--the way that we normally refer to equity, there are
different ways you can do it--is, what rate of return does the
individual get on their payroll contributions? There are other
ways to look at equity. Equity in that definition would be
enhanced. Adequacy would be maintained. But there are certain
other things that one would have to say in the interest of full
and fair disclosure. It presumes that these surpluses will
Mr. Matsui. Without getting into your conversation, did he
ever talk about the maintenance cost of all this? You know,
somebody who gets $400 a year in this account--$20,000 annual
income, that person then invests. He has a fund manager and
whatever the overhead costs to have that fund manager
administer the fund. Then, obviously, after the 75 percent is
taken out of that--the tax, 90 percent, or whatever it might
be--that person has to get an annuity account. I guess there is
a cost to that. Did he walk you through that?
Mr. Walker. Dr. Feldstein has not really focused on the
administrative aspects criteria. In fact, that is one of the
elements that we include in ours that is important to focus on.
Mr. Matsui. You know what I think would be a good idea? If
you could look at the Feldstein plan as he described to you and
all the paperwork, then maybe test it against your five
criteria. Then, maybe give us a written response to that. I
don't know what he told you and what his plan is, because it
changes all the time, I understand. So, if you could look at
the plan he offered you, with all the paperwork; then test it
against your criteria and send us a letter. I really want this.
It will help us really analyze whether Mr. Feldstein's plan
meets kind of your test. I think it really would be important.
Is that something you feel you could do?
Mr. Walker. He didn't give us any paperwork. It was just an
interview. I think what we potentially could do is to try to
answer these questions with factual information. The Congress
has to draw its own opinions and conclusions about whether or
not it meets the test. I think our job is to give you facts to
try to provide you with a framework, so that, hopefully, you
can make decisions.
Mr. Matsui. Oh, no, I understand that. I understand that,
but we need some conclusion. We just can't throw a lot of
principles up in the air and not come to a conclusion.
I know my time has expired, but let me just, if I may--
again as Dr. Feldstein developed his plan to you, is that
sustainable? You know, he is using this surplus. It is huge tax
consequences. Then the clawback--I call it a confiscatory tax
on the assets, but most people like to call it a clawback--I
understand it could be up to 90 percent. That is more than
Mr. Walker. If the assumptions prove valid, it would meet
the test of sustainability.
Mr. Matsui. When you say ``if,'' I need to know what that
means. That is really important. Because, otherwise, they may
say you say it is valid. What are the assumptions we are
Mr. Walker. For example, are the surpluses going to
materialize or not? Second, are the incremental rates of return
going to be achieved?
Mr. Matsui. All of the surpluses are used for this purpose
rather than using it for defense spending?
Mr. Walker. The 2.3 percent. Are the incremental rates of
return going to be realized? So there are certain key elements
that you would have to look at. I assume that we are going to
be back to testify on a variety of proposals.
Mr. Matsui. I would hope so. I would hope so.
Mr. Walker. And, frankly, I think that we will practice
what we preach. We will use our criteria in doing that. I think
that is important. But his program by design would be
Mr. Matsui. If you don't use any of the surplus except for
the tax credit, and if, in fact, whatever the clawback
percentage is is adequate--right? I mean it could be 99
percent. We don't know what it could be.
Mr. Walker. I think one of the challenges, Congressman,
that I mentioned to Dr. Feldstein is the so-called clawback.
How are people going to react to that? If you have an account
with your name that builds up over 20 years that has an account
balance of ``x'' in it, and all of a sudden 75 percent or 90
percent of ``x'' disappears, I think there could be a real
expectation gap there. Now, there are different ways to achieve
that same objective, if you wanted to. I think that is a matter
of concern and that is one the questions that is in this list.
Mr. Matsui. If I could just add, I just want to make one
observation. If that clawback is up to 90 percent, or even 85
percent, 75 percent, it is almost as if this is a way to avoid
the government investing in the market. Basically, the
government invests in the market through individuals. Then you
have, obviously, the overhead costs. Because it is a big tax
coming back, the government, ultimately, gets the money anyway,
except it is less efficient than if the government invests
directly in the market. It is kind of an interesting concept
that uses individuals basically to invest for the government,
because the government gets almost all the money back anyway.
That is for another day, I know.
Mr. Walker. Well, Dr. Feldstein was fairly clear with me on
two points. One, he felt that it was important to preserve the
surplus in a way that would increase real saving. This is one
way to do it. Second, he felt that it was important to prevent
political manipulation of the trust fund investments. His
opinion is that individual accounts would help to prevent that.
I think that is one of the reasons he constructed it the way
that he proposed. There are other ways you could do it.
Mr. Matsui. The business to go into would be fund managers.
Great opportunities for young people. Thank you.
Chairman Shaw. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I want to thank our
witness for, again, giving us a sober assessment of our
challenges. You are not approaching this like you approached
Medicare, Mr. Walker, which you said earlier presents an even
greater challenge. In fact, your statement that we can exceed
the expectations of all generations--those who are already in
their retirement years, those who are near retirement and then
those of us who are in the baby-boom years and younger
generations--is accurate. I think that makes this debate a
little more fun than the Medicare debate, which is probably
more difficult. I don't object to talking about the Feldstein
proposal. I know it is not really the subject of the hearing.
We are focusing on the goals and criteria for assessing
reforms, but I think it is very interesting to go through it. I
know it is evolving. I know that the specifics are not out
there. It is a very interesting idea to take the notion that
the President laid out back in December of last year, which is,
if you don't want to raise taxes and you don't want to reduce
benefits, given the demographic realities that you charted out
so well, the most promising way to do that is to get a higher
rate of return for beneficiaries. The question is, how do you
do that? I think there is a legitimate debate to be had on
I think, as the Chairman said earlier, there is a lot of
skepticism about the government making those decisions. We
certainly heard from Chairman Greenspan on that. The question
is whether an individual-directed investment does give this
ability to exceed expectations and to make this an improvement
of the current system without sacrificing any of the security
that is currently invited in our Social Security system. I am
looking forward to this debate continuing.
I will get back to your testimony and the focus of the
hearing for a second. At the beginning of testimony you talk
about the three-legged stool. I am going to go back to that
analogy that is used a lot. I like it because I think it is
realistic. As you know, probably, there was more money paid
under employer-based private pensions and public pensions--
403(b)s, 457s--last year than under Social Security. It is a
very important part of retirement security for all Americans.
As you know, Mr. Cardin and myself and many Members of this
Subcommittee have a bill that we introduced a couple weeks ago
on that topic. We had a good hearing the day before yesterday
where we had testimony from all sides.
Have you taken a look at that issue? I mention it because
you do get into the three-legged stool at the outset. Have you
had a chance to look at the legislative ideas to simplify and
expand the private side to ensure retirement security?
Mr. Walker. I need to look at the most recent bill,
Congressman. As you probably know, I was Assistant Secretary of
Labor for ERISA for several years--so this is an area that is
very near and dear to my heart--in addition to being a former
trustee of Social Security and Medicare. I do think there is a
need for simplification. I know that some of the things that
you have been talking about, both yourself and Congressman
Cardin, would be a step in the right direction. I need to look
at the bill. I will do that. To the extent that you would like
any comments on that, I would be happy to talk to you about it.
Mr. Portman. I would love to. I don't want to overburden
your folks behind you there, who are focusing on Social
Security. I would just make the point that the purpose is to
ensure retirement security. I think Congress, over the last
decade and a half, has gone the wrong way in terms of the
private side until very recently. Here is an opportunity this
year with Social Security reform, which I think has to be the
bedrock. Because, as you say, about 20 percent of Americans
rely on it exclusively. Most Americans now are in some kind of
a pension system. We want to expand that number greatly. It is,
again, a tremendous opportunity. I would love for you to take a
look at it. PBGC, the Pension Benefit Guaranty Corp.,
incidentally, testified and they are very positive both on what
we do on the defined benefit side--of course, where they are
more involved--but also on the defined contribution side.
One other question, if I might, quickly: When you look at
your criteria at the end, which I think are good, on financing,
balancing adequacy and equity, and some of the implementation
and administrative aspects, if you could apply that to the
various proposals, including the President's proposal, I think
it would be helpful. The President didn't pretend to save the
system for 75 years. It is not a specific proposal, yet, in
writing. It does have some ideas in it. I think it doesn't meet
the criteria that you have laid out, with a couple of
Finally, in your testimony before the Senate, you talked a
little about what you thought might need to happen with regard
to Social Security reform to have it be effective. You said
that the greatest array of possibilities and different
approaches should be looked at. I think it was on page 15 of
the February 9 testimony before Senate Finance you said that
different approaches needed to be combined, including
individual accounts. Do you believe that is part of the answer
if it can be properly structured?
Mr. Walker. Well, I don't believe it is appropriate for me
to take a position on whether or not I think individual
accounts are part of the solution or not. I think in my
testimony what I said, Congressman, is that one of the things
that you need to do is you need to look at a package. There are
ways to take different elements and combine them in a package
in a way that will achieve overall objectives. It is possible
to do that with individual accounts. I don't want to take a
position on whether or not I am for or against individual
accounts. I don't think that is appropriate for me to do.
Mr. Portman. I think that is fair. It is good to have GAO's
objective analysis out there. We look forward to working with
Thank you, Mr. Chairman.
Chairman Shaw. Mr. Levin.
Mr. Levin. First of all, Chairman Shaw, I read over the
resolution that you referred to--the 99-to-nothing vote--and I
just don't think anybody should be under a misconception that
there is no support for some system of investment of these
funds other than individually. As I understand the discussion,
or the approach, in the Senate it was the use of the word
``directly'' in front of ``invest contributions'' was thought
by many Democrats to mean that there would not be a board of
independent managers. So, no one here should think that the
vote in the Senate means that there is no support for the
Second, I just want to say to you, Mr. Walker, I think
neutrality on your part may well be important. It is going to
be very difficult for you to maintain it. You are delving into
issues that are complex and also controversial. Also, you may
have taken positions in the past that aren't neutral on these
subjects. Weren't you part of a commission that took a position
on Social Security reform?
Mr. Walker. Let me address that. Thank you. I have fully
disclosed that, prior to assuming the responsibilities as
Comptroller General, I have served in a number of government
positions and I have been on various commissions. One of the
commissions that I was on was the Center for Strategic
International Studies' Commission on National Retirement
Policy. Senator Breaux, Senator Gregg, Congressman Kolbe, and
Congressman Stenholm were also on that Commission. That
Commission did come up with a reform proposal as a package. It
passed 24 to nothing. I was one of the commissioners that voted
At the same point in time, there are things in it that I do
not like. There are also things that I would prefer to be
included that were not in it. And that was prior to assuming my
Mr. Levin. OK, I just wanted to indicate that because of
the nature of the subject matter and your past--your taking
positions in the past, it is going to be difficult I think--you
have a real challenge to give the perception and the reality of
neutrality. I have not studied before in detail these
questions, but, for example, I do not see here--maybe I missed
it--a question about what would be the impact of any plan on
other governmental expenditures. Now, maybe it is here, and I
do not see it.
Mr. Walker. I think indirectly it is, Congressman. For
example, what is the impact on the deficit--what is the impact
on the Federal budget? What is the size of the program as a
percentage of GDP? I think that was our intention of trying to
get to the point that you are raising, because I think it is an
Mr. Levin. OK, well, I think those are different issues. By
the way, the Feldstein plan has been in writing, as well as
your having discussions. I am just curious--look at your first
questions and just answer objectively. Does the Feldstein plan
restore 75-year actuarial balance?
Mr. Walker. If his assumptions prove valid, the answer is
Mr. Levin. Does it reduce the debt held by the public?
Mr. Walker. No. You cannot spend the money twice, in other
Mr. Levin. OK. And in terms of requiring an increase in
taxes, that depends on its assumptions, right?
Mr. Walker. Right, it would use part of the surplus, which
is general revenue financing, but----
Mr. Levin. It does?
Mr. Walker. Correct.
Mr. Levin. OK.
Mr. Walker. Well, it does not require a current increase in
taxes, no. It uses part of the surplus, which would represent
general financing, but it does not necessarily require a
current increase in taxes, no.
Mr. Levin. One last question: you say one of the key things
is whether a plan could readily be explained to the public. How
can you explain to the public convincingly a plan that would
take three-quarters back of any return? You think you can go
before the public and explain that persuasively?
Mr. Walker. I think that it is one of the largest
challenges associated with this proposal, and I mentioned this
to Dr. Feldstein; that from a practical standpoint, if you have
an account that accumulates in your name over a number of
years, and you have a clawback of a material percentage, I
think that is a problem.
Mr. Levin. Seventy-five percent.
Mr. Walker. That is right. I think it is a real problem.
Mr. Levin. Or more. OK.
Mr. Walker. I think there are ways you could get the same
thing done different ways, if you wanted to, but I think that
particular approach is a real problem.
Mr. Levin. Thank you.
Chairman Shaw. I would like to point out, Sandy, that on
the bottom of the first page of Mr. Walker's testimony, it says
that--in talking about the basic criteria--the extent to which
the proposed proposal achieves sustainable solvency and how the
proposal would affect the economy and the Federal budget is
important. I think that is about as inclusive as you can get.
And I think, also, it is important to point out that, if we
start thinking that we are to only bring people into the
Federal Government who do not have any opinions, we are going
to end up with a lot of stupid people.
Mr. Levin. Let me just say, I do not suggest that for a
moment. I do think that everyone should be aware, though, of
what they bring to the government. And, in your case, I am
urging your neutrality--you come as having expressed an opinion
in favor of a particular proposal. And you--I mean, everybody
knows that. I am just saying that I think it makes your job all
the more difficult.
Mr. Walker. One thing I could tell you, Congressman, if I
had to draft a proposal of my own, it would be a different
proposal. I think that is one of the things that the Congress
needs to focus on here, quite candidly, is that reform has to
be considered as a package. There are tradeoffs in packages.
There is a statement that I included in the record of the CSIS
report that I would commend to you to look at. But I have been
a trustee of Social Security and Medicare. I have been
Assistant Secretary of Labor for ERISA. I have never ever had
anybody question my integrity or objectivity. I can assure you
that you won't need to. Thank you.
Chairman Shaw. I am absolutely sure of that. You are CPA,
are you not?
Mr. Walker. Yes, I am, among other things. I won't say that
necessarily does it, but I appreciate the thought.
Chairman Shaw. Mr. Tanner.
Mr. Tanner. Thank you, Mr. Chairman. I just have one
When Chairman Greenspan was here, he said the single best
thing this government could do now ``to save Social Security''
would be to reduce the outstanding debt, nongovernmental debt.
Do you agree?
Mr. Walker. We are on record as saying that paying down
debt held by the public is the most certain way to increase
future economic capacity and growth.
Mr. Tanner. Thank you. I yield back.
Chairman Shaw. Mr. McCrery.
Mr. McCrery. Mr. Walker, I want to, first of all, point out
that, at the time that you and Mr. Stenholm and others were
working on that proposal, we were still expecting deficits at
the Federal level. Times have changed quite a bit since you all
developed that proposal, and I think you would say that the
change in the fiscal condition of the Federal Government
presents other options perhaps for dealing with Social Security
than you all had to look at when you were putting together that
Mr. Walker. There have been material subsequent events, and
that is one of them that I think obviously the Commission would
Mr. McCrery. I want to get back a point made by the
Chairman. He said that the 2013 date is important because, in
2013, we would either have to raise taxes or cut benefits.
Well, that is not exactly correct, is it? If the country is
running a surplus through 2013, another option would be to
simply pay down less of the Federal debt, the public debt, in
order to redeem the bonds in the trust fund?
Mr. Walker. That is correct from a macroeconomic
Mr. McCrery. We could do that without raising taxes or
without cutting benefits, is not that correct?
Mr. Walker. From a macroeconomic standpoint, yes. I think
what the Chairman was referring to was you need to deal with it
at two levels: macro, which is the unified budget, which is
what you are referring to; and micro, which is the program
itself, which is intended to be self-financing and self-
sustaining. It won't be self-financing and self-sustaining
starting in 2013, at least from a cash perspective.
Mr. McCrery. Well, yes, it will, because it will have bonds
in the trust fund, backed by the full faith and credit of the
United States government, that are redeemable. So, it is self-
financing. The fact that we have to draw cash from the general
fund to redeem the bonds should not make us say that the trust
fund is a fiction. It is not a fiction.
Mr. Walker. Well, I think that is an important point,
Mr. McCrery. It is internal debt. It is fully redeemable.
Chairman Shaw. Would the gentleman yield?
Mr. McCrery. Surely.
Chairman Shaw. You are taking something out of context. I
said, would the result be different with or without the trust
fund. And, clearly, it would not be because, where is the money
coming from that is being paid out in benefits? It is coming
from a combination--right now, it is coming out of the payroll
taxes, FICA. After 2013, it is going to have to be a
combination of general revenue from the government and the FICA
tax; or, in the alternative, increasing the FICA tax. So let me
be sure the record is very clear on that. And the result is the
same, whether you have the trust fund or not.
Mr. McCrery. You are correct on that. But it is not correct
to say that in 2013 we will either have to raise taxes or cut
Mr. Walker. Well, I think I responded to that. But I think
you are making an important point, which needs to be made, and
that is there is substance to these obligations. These
obligations are guaranteed as to principal and interest. They
are backed by the full faith and credit of the U.S. Government.
In effect, what we have in Social Security is certain
obligations. The obligations represent the promises that are
made for benefits under current law. Some of those obligations
are backed by payroll tax revenues. Some of those obligations
are backed by government bonds. And then we have a financing
gap, which has to be closed.
I do not want people to think that those bonds are not
worth anything. They are. But from a macroeconomic standpoint,
you have got to pay off those bonds. You cannot pay Social
Security benefits with bonds. You have got to pay them with
cash. And so, therefore, from a macroeconomic standpoint
eventually we are going to have to pay the bonds off.
Mr. McCrery. Absolutely. But if we are running an overall
surplus at the Federal level at the time we have to redeem
those bonds in the Social Security Trust Fund, we do not have
to raise taxes. We can simply redeem less of the publicly held
debt, and redeem more of the internal debt in the Social
Security Trust Fund.
Mr. Walker. And I agreed with that.
Mr. McCrery. And that points up one, I think, very good
facet of the President's proposal on Social Security. He does
propose to use a good portion of the expected surplus to buy
down the publicly held debt from now through 2013 and beyond.
And that gives us the flexibility--if we adhere to that, it
gives us the flexibility when payroll tax revenues are
insufficient to meet the demands of the Social Security payout
to simply transfer from redeeming publicly held debt to
redeeming debt in the trust fund without raising taxes. So I
think the President's plan is a good one in that respect.
Mr. Walker. We are on record saying that that is a very
positive element of the President's plan--paying down debt held
by the public.
Mr. McCrery. Now, you note in your testimony, that
comparing reform options to current law is not an appropriate
benchmark. What is an appropriate benchmark?
Mr. Walker. I think you have to look at two different
elements. You have to look at promised benefits and funded
benefits. I have seen people out there doing comparisons where
they will end up comparing a reform proposal to current
promised benefits, but there is a 2.19 percent payroll tax
financing gap on promised benefits. We do not have the revenues
to meet promised benefits. Therefore, you cannot just consider
promised benefits, you also have to consider funded benefits
when you are comparing various reform proposals.
Mr. McCrery. Thank you.
Chairman Shaw. Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman. I would like to follow
up on some of Mr. McCrery's questioning, because I do think the
President's outline or proposal does have the trust fund more
like a trust fund, to the extent that there are investments of
funds in equities. That makes them more like a trust fund
because it is going to be less paying down of public debt to
the extent that moneys are invested in equities. And second,
the returns are going to be producing more revenue that
ultimately will be to the benefit of the United States
Mr. Walker. I agree. That element is more like a real trust
fund. It would result in incremental rates of return above and
beyond Treasury bonds.
Mr. Cardin. And I would just like to underscore the point
that the Chairman made, and I guess you are making also, and
that is one of the ways to evaluate is to what extent does it
provide a reasonable return on investment; that Democrats and
Republicans all agree that what we need to do is get a better
rate of return in the Social Security system. And I assume the
reason you list that here is for us to evaluate recommendations
or plans as to how well it fares on providing a better rate of
return for the Social Security system?
Mr. Walker. Right. I think there are two ways: Rate of
return for the Social Security system, and rate of return for
the individual beneficiaries who are paying taxes.
Mr. Cardin. That is true, and the Chairman pointed out the
99-to-0 vote in the U.S. Senate. And I just want to underscore
the point that Mr. Levin made and that is there is total
agreement that we do not want direct investment by government
officials. That is not the President's proposal. The
President's proposal is to have those investments made through
a private entity; through protection in law on the entity that
selects how investments are made. And you have also indicated
that as a criteria to review proposals by to what extent does
the proposal limit the potential for political-motivated
investment decisions. I assume that is one of the reasons you
listed that there.
Mr. Walker. That is correct. We have crossed that bridge
before in connection with the Federal Thrift Savings plan,
although clearly one has to recognize that the magnitude of the
dollars here are a lot higher and the number of people affected
are a lot greater.
Mr. Cardin. I assume there is always a risk here--whatever
plan, even with private accounts, that are set up through a
Federal structure. There is also a concern that we set it up in
a way that minimizes that risk.
Mr. Walker. Absolutely.
Mr. Cardin. You also indicate as one of the standards to
what extent does the proposal increase national savings. And I
just really want to underscore the point that Mr. Portman made.
It may well be that our legislation is not one that will be
directly linked to Social Security changes, and we can fully
appreciate that. But it seems to me that related proposals that
try to increase a private retirement savings are consistent
with what we are trying to do on Social Security; that is, to
provide for a stronger retirement security for Americans; yes,
by strengthening Social Security, but also by looking at why we
have not done better as a nation on private savings; why we
have not done better as a nation for private retirement. And,
yes, the direct proposal might help us in that regard. But
there will also, I hope, be efforts made to combine other
proposals to look at existing mechanisms in place for private
savings and retirement that can help strengthen this Nation's
Mr. Walker. I think that is very important, Congressman.
When I look at retirement security, I think there are a couple
of elements: one, to make sure that Americans have an adequate
stream of income throughout retirement; and second, to make
sure they have access to affordable health care. To deal with
that, you have to look at Social Security, private pensions,
personal savings, Medicare, employer-provided health care, and
individual health care arrangements, among other things.
Mr. Cardin. And the last question I have for you--I am very
impressed by your written and oral presentations here and your
commitment of objectivity in evaluating proposals. We need
that. And we need to be able to bridge a way to come forward I
hope with a bipartisan recommendation for Social Security.
My concern is that you have said in evaluating at least a
verbal presentation of a proposal, but Dr. Feldstein, that
based upon his assumptions or based upon--how do you determine
how realistic those assumptions are?
Mr. Walker. We can take a shot at that. And I imagine that
we might be asked to take a shot at that. One of his
assumptions is the rate of return with regard to equity
investments. And there are a lot of other people that are
talking about rates of return for equity investments like the
President. The President had to make an assumption as to what
he was assuming the incremental rate of return would be on his
proposed equity investment by the trust fund. I can look and
verify this, but I think both may have used something close to
a 7-percent real rate of return. I will look to try to verify
Mr. Cardin. Let me make just one suggestion to you. It may
be helpful to us in evaluations as to how risky assumptions
are. Some proposals have very little at stake on sums that are
pretty well known. Transferring some of the surplus directly
into the trust fund is a known quantity. There are no
assumptions there. Whereas, other proposals have much more
risky outcomes because assumptions are not as certain. And I
think it would be useful for this Subcommittee if you could
help us in saying how safe or how much risk there is involved
in the assumptions that are used in order to achieve our
In 1983, we missed. We did not get where we thought we
would get. And I hope in 1999 we are more accurate in reaching
what we need to do in Social Security.
Mr. Walker. I think there are two ways we can help on that:
One is the structure of the proposed reform. What are the
risks, for example, that the government will assume from
contingent liabilities? And then, second, what are the risks
associated with the underlying assumptions that relate to
reform? And I think it is very relevant for us to help the
Congress look at those.
Mr. Cardin. Thank you.
Chairman Shaw. Thank you. Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman.
Mr. Walker, I just wanted to ask one more question. It was
prompted, actually, by Mr. Cardin's question. Do you know how
much revenue loss is attendant to the Feldstein plan, using the
2.3-2.2 percent, whatever it is--tax credit of income up to
about $74,500 over the next 15 years, should it come into play?
Mr. Walker. I do not, but I can provide it for the record.
[The following was subsequently received:]
In response to the questions about Martin Feldstein's
Social Security reform proposal, Rep. Matsui has asked that GAO
instead examine the proposal put forth by Chairmen Archer and
Shaw because the latter proposal is under discussion in the
House. GAO is preparing a report in response to Rep. Matsui's
new question that will be available late in the year.
Mr. Matsui. OK, the reason I ask that is because you are
saying you are basing your conclusions on a number of
assumptions. So I would have to assume that you know what the
revenue loss will be over 15 years or 5 years or 10 years. I
was under the impression it was somewhere in the range of $4.8
trillion, but maybe that number is out of sight. I thought it
was, like, for the first 10 years about $1.8 trillion, and then
for some reason it just really bounces up. But I am surprised
you do not know that number. You will have to forgive me by
making that observation, because you have basically said this
is sustainable based upon the assumption----
Mr. Walker. The overall assumptions, that is correct.
Mr. Matsui. A number of assumptions. But then, if you have
not really costed it out, I do not know how you can even reach
that conclusion. I am somewhat perplexed by that.
Mr. Walker. Well, our people----
Mr. Matsui. I would expect that we have a little more
concreteness in the analysis, particularly, the Comptroller
General. I mean, it seems to me that you cannot reach a
conclusion and not know that basic number about how much
revenue loss there will be.
Mr. Walker. As you can imagine, Congressman, there are
about 3,200 people who work at the GAO, and we have had a lot
of people do a lot of analysis of this. I would be happy to
provide that number for the record.
Mr. Matsui. Well, well, no. Let me say this----
Mr. Walker. I just do not recall it off the top of my head.
Mr. Matsui [continuing]. Your response is very legitimate.
Mr. Walker. Surely.
Mr. Matsui. On the other hand----
Mr. Walker. Yes.
Mr. Matsui. You were appearing before a congressional
Committee to address what you, yourself, admit was probably the
most important policy issue we are going to be deciding over
the next--maybe our entire careers. And here you kind of just
threw out, that based upon these assumptions, it is
sustainable. And I am just really kind of perplexed by that. I
would just expect a little bit more out of a professional as
you are in that kind of a situation.
Mr. Walker. Yes.
Mr. Matsui. Well, let me finish.
Chairman Shaw. If the gentleman would yield, though. I
think what you are saying is very, very unfair.
Mr. Matsui. It is not unfair.
Chairman Shaw. That is about as professional an opinion I
could possibly hear, and, also, it is coming from about the
most neutral corner you can possibly find to say, assuming
these things are true, then it is sustainable.
Mr. Matsui. Yes, but, you do not which----
Chairman Shaw. It is not being an advocate. It is not being
an advocate for----
Mr. Matsui. If I can take back my time--we do not know
exactly--you do not even know what these assumptions are. That
is what my problem is. I thought you did know that number.
Mr. Walker. No, no, Congressman, in fairness----
Mr. Matsui. That is a followup suggestion.
Mr. Walker [continuing]. In fairness, Congressman, we know
a lot more than you are giving us credit for.
Mr. Matsui. Well, what is that number?
Mr. Walker. I do not recall off the top of my head, but
then, again, do you recall what the number is for the amount of
Social Security obligations right now?
Mr. Matsui. Well, no, but I am not making a conclusion.
Mr. Walker. The fact of the matter is that the Social
Security actuaries and the CBO calculate the exact numbers. Our
staff is closely coordinating with them. The fact of the matter
is the President's proposals have assumptions in them, too. And
that is one of the things that we all have to recognize here is
a lot of these proposals are based upon assumptions. And I
think it is very relevant, Congressman----
Mr. Matsui. Mr. Walker----
Mr. Walker. Can I finish, Congressman, for a second?
Mr. Matsui. Well, let me----
Mr. Walker. I think it is very relevant, Congressman, for
us to look at the validity of those assumptions and to help you
understand the risks, and we will do that.
Mr. Matsui. And let me say this, Mr. Walker: I appreciate
what you just said. On the other hand, I have to say that you
gave the impression that based upon these assumptions, this is
sustainable. But you did not know what these assumptions were.
And I just do not know how you can come before this
Subcommittee, and actually reach that conclusion. Now, if you
would have just basically said, look, we are doing a study on
this, and we do not know exactly whether it is sustainable or
not, that is a very, very legitimate answer. And then I could
not trust it any further. But you basically concluded that this
was a sustainable proposal based upon assumptions. And all you
raised was that economic growth would continue where you will
continue to have a surplus. But it seems to me it is pretty
obvious that you should know what the revenue loss would be----
Mr. Walker. With all due respect, Congressman, what I did
not know was the exact number of 2.3 percent times the
projected taxable wage base of younger workers for the next 15
years. That is what I said I did not know. I know what the
assumptions are for the President's projected budget surplus. I
have seen what the numbers are for the CBO. I just did not know
what 2.3 percent times of that wage base was.
Mr. Matsui. I think, as Mr. Levin said, because you have
some preconceived notions coming before this Subcommittee, it
would just make us feel a little bit more comfortable if there
was just a little bit more caution in your observation.
Chairman Shaw. I would like to make this final observation,
if I could. To begin with, this is not a hearing on the
Feldstein proposal. And I think if you think that the
Republicans are going to be introducing a plan that is going to
be a carbon copy of the Feldstein proposal, I think that, based
upon your comments, that you will be delighted with what we
might introduce. I also say that this witness has simply said
that his only exposure to the Feldstein plan is an hour spent
with Mr. Feldstein, and he is neither an advocate of the
Feldstein plan, nor is he an expert on the Feldstein plan. And
I think that this line of questioning has been tremendously
unfair and below the dignity of this Subcommittee.
Mr. Walker, thank you very, very much.
Mr. Walker. Thank you. I appreciate it.
Chairman Shaw. I appreciate your being with us again today.
Now, I would like to introduce the next witness from the
Social Security Administration, Mr. Stephen C. Goss, Deputy
Chief Actuary for Long-Range Actuarial Estimates.
Mr. Goss, as other witnesses, we have your full text of
your testimony, and we will submit that for the record. And you
may proceed and summarize as you see fit.
TESTIMONY OF STEPHEN C. GOSS, DEPUTY CHIEF ACTUARY, OFFICE OF
THE ACTUARY, SOCIAL SECURITY ADMINISTRATION
Mr. Goss. Mr. Chairman, Members of the Subcommittee, thank
you very much for the invitation to come here and speak to you
today about the work we do at the Office of the Chief Actuary
at the Social Security Administration in assessing the
financing and the financial status of the Social Security
system into the future.
There are two primary functions that we serve at the Social
Security Administration in the Office of the Chief Actuary. And
the first one of those is related to the statutory legal
requirement of the board of trustees to report annually to the
Congress on the status of the Social Security system. Two
different financial estimates are required in that law. One is
an assessment of the financial status of the system over the
next five fiscal years; and the other is referred to as a
statement of the actuarial status of the program, and it is not
further defined in law. Over time, though, the actuarial status
of the program has evolved into meaning an assessment of the
financing of the system over a 75-year period.
The other primary function that we fulfill at the Office of
the Chief Actuary at the Social Security Administration is to
provide estimates and analysis of potential legislative
proposals that are developed by Members of Congress and by the
administration. To the best of our ability, we provide
objective and thorough analysis on these proposals that will be
useful to policymakers, who are the ones that will ultimately
make the decisions, as you do, in terms of where we will be
going in the future with this program.
I will turn, momentarily, to the current financial status
of the program. As you all are well familiar, the program
provides monthly benefits currently to over 44 million
Americans and the primary financing for this, for these
benefits, is based on payroll taxes from about 150,000,000
working Americans. Currently, we are operating with annual
surpluses to Social Security. The total tax revenue is
exceeding the cost of the program, and as a result our trust
funds are growing in magnitude.
There are three principal dates that are often referred to
in terms of the financing of Social Security. The first one
that was discussed at some length with the prior witness, David
Walker, is 2013; the year in which the tax revenue to the
system will first be insufficient to be able to pay for the
cost of the system. Therefore, there will be a necessity to be
withdrawing some money from the trust funds.
A second date that is sometimes referred is the year 2021,
which under the intermediate assumptions of the 1998 Trustees'
Report, would be the first year in which the combination of
taxes and interest on the existing trust funds would be
insufficient to pay for the cost of the program.
The third date, and I would suggest from the point of view
of the work that we do related to the financing and the
solvency of the Social Security system, is perhaps the most
important date of these three, is the year 2032, the date in
which the combination of taxes and money available from the
trust funds will be insufficient to pay the benefits to the
system. This is one of the very few points that I can think of
where I would disagree on a technical point with David Walker.
As of the year 2032, when the trust funds will be exhausted
and will no longer be available to be able to augment the tax
income to the Social Security system to allow us to pay
benefits in full, on a timely basis, there will be continuing
tax revenue coming into the system under our current
intermediate projects that would be equivalent to about 71
percent of the cost of the system. This is, I think, a useful
measure in giving some sense of how far it is we have to go to
put the system back into proper financial balance.
What are criteria for evaluating options for reform of the
Social Security system? You are all familiar with the very
great complexity of this system. The fact is that it has been
over six decades in evolution. It reflects the collective
judgment of policymakers like yourselves and of several prior
generations in evolving a very complex and important system for
providing income to people when they have a loss of income
because of retirement, disability, or death of a worker in the
There are two primary considerations for evolving a plan
for Social Security. One is the relationship between equity and
adequacy that David Walker spoke to and also addressed in
describing the benefit structure.
The other is the nature really the nature of the financing
and the financial status of the Social Security Trust Funds
under the particular plan. The work that we do in the Office of
the Chief Actuary relates very largely to the latter of these,
to assessing the financial status of the trust funds under the
As you are familiar, we are at this point in time in pretty
good shape for Social Security financing--to 2013 by
everybody's assessment, and out to even 2032 from the point of
view of the solvency of the trust funds under our intermediate
For that reason, I will focus in the remaining moments here
on some concepts of the long-range financial status of the
program and some of the measures that we think of when we try
to evaluate these concepts.
The fundamental criterion for the solvency of the Social
Security system has to be the ability to pay benefits in full
on a timely basis. When we reach the point of trust fund
exhaustion, that means we will not be able, under current law,
to pay benefits fully on a timely basis. The taxes will be
insufficient, and the trust fund will be exhausted.
The most commonly cited single value or measure of the
status of the trust fund is the term referred to as the
actuarial balance, which is a representation of the summarized
present value of the system's income relative to the summarized
present value of the system's outlays over the next 75-year
period. Currently, the number that we are all familiar with is
that this actuarial balance is a negative 2.19 percent of
payroll. As a negative, we sometimes refer to it as actuarial
deficit. One possible way of interpreting this 2.19 percent
deficit is that if we were, starting today, to raise the
payroll tax rate from its current level of 12.4 percent up to
about 14.6 percent, raise it by 2.2 percent of the payroll,
that would be sufficient to put the system in balance and make
benefits payable over the next 75 years. And I would hasten to
add that this 2.2 is really only intended to be a marker and
not any indication by any of our forefathers that this should
be the way that should be pursued for putting Social Security
back into balance. Any combination of benefit changes or
revenue changes that will, in total, result in the same amount
of money equivalent to a 2.2-percent increase in the payroll
tax that will be sufficient to put the system in balance.
There is one additional measure. There are actually many
others that we could talk about. But there is one additional
measure that I would like to mention--that was discussed
somewhat with the prior witness--and that goes beyond the
actuarial balance for the current 75-year period. With this
measure we look at the extent that there is stability in the
actuarial balance in the future. We measure the extent to which
stability will occur by looking at something referred to as the
``trust fund ratio,'' which is simply the ratio of the amount
of money we have in the trust funds at a given moment in time
as compared to what annual benefits are. At this point in time,
we are approaching a point where we have about 2 years of
benefits held in our trust funds. What is critical is that this
ratio, the percentage of benefits held in the trust funds is
fairly constant toward the end of the period. If this is the
case, then we will be in a position where our actuarial
balances will not be moving toward negative. They will be
fairly stable in the future. So a very, very reasonable way to
look for stability in the trust fund financing is whether or
not these trust funds, as a percentage of annual outgo, are
fairly stable at the end of the period. This, by the way, does
not require that the tax income is equal to the outgo at that
time. If, indeed, there are funds on hand that are generating
interest sufficient to not only maintain the level of the trust
funds, but also help pay for some of the benefits at that time,
then it is possible to have the tax income fall somewhat short
of the cost of the program.
This concludes the remarks that I would like to pass on to
you at this point and would very much enjoy hearing any
questions you might have.
[The prepared statement follows:]
Statement of Stephen C. Goss, Deputy Chief Actuary, Office of the
Actuary, Social Security Administration
Mr. Chairman and members of the Subcommittee, thank you the
opportunity to describe the work of the Office of the Chief
Actuary in assessing the financial status of the Social
The Social Security Act requires that the Board of Trustees
report annually to the Congress providing the expected
operations and status of the Old-Age and Survivors Insurance
(OASI) and Disability Insurance (DI) Trust Funds for the next 5
fiscal years and ``a statement of the actuarial status of the
Trust Funds.'' The Office of the Chief Actuary works with the
trustees in the development of this annual report of the
financial status, under present law, of the program.
In addition, the Office of the Chief Actuary provides to
the Administration and to the Congress estimates of the
financial effects on the Social Security (OASDI) program of
potential or proposed legislation. The mission of the Office of
the Chief Actuary is to provide objective analysis that will
permit policymakers to make informed decisions about the future
of the Social Security program.
Current Financial Status of The Social Security Program
The Social Security program currently provides monthly
benefits to about 44 million individuals. The primary source of
financing is a payroll tax on the nearly 150 million workers in
covered employment. Tax revenue currently exceeds the cost of
the program, so the trust funds are growing. Trust funds are
currently almost twice the size of the annual cost of the
program, and growing.
Based on the intermediate assumptions of the 1998 Trustees
Report, tax income to the OASDI program is expected to exceed
cost until 2013. The combined OASI and DI trust funds are
expected to continue growing until 2021. The combined trust
funds are then expected to decline until they are exhausted in
At the point of trust fund exhaustion in 2032, continuing
tax income is expected to be equal to 72 percent of the cost of
Criteria for Evaluating Options for Social Security Reform
The Social Security program is a complex system developed
over more than 6 decades to provide monthly benefits that offer
what has been referred to as a ``floor of protection'' against
loss of income due to retirement, death, or disability. The
program provides a blend between individual equity and social
adequacy that has evolved through the judgement of several
generations of policymakers.
Both Annual Trustees Reports and estimates by the Office of
the Chief Actuary for legislative proposals focus primarily on
the financial status of the OASDI program. Because current
program financing is expected to be adequate for the full
payment of benefits on a timely basis for over 30 years, I will
describe the criteria used for evaluating the ``actuarial
status'' of Social Security over the long run.
The actuarial status of the OASDI program is evaluated over
a 75-year, long-range projection period. This period provides a
view of the adequacy of financing over the entire lifetime of
virtually all current participants in the program, from the
oldest beneficiaries to the youngest workers. This period also
provides the opportunity to view the full, mature financial
effects of legislative proposals that may take decades to
become fully implemented.
The most fundamental criterion for evaluating the financial
status of the OASDI program is its ability to pay full benefits
in a timely manner. The inability to do so is indicated by
expected exhaustion of the trust funds within the 75-year
Perhaps the most commonly used measure of long-range
solvency of the OASDI program is the actuarial balance. This
measure indicates the size of the difference between expected
financing and cost for the program over the 75-year period, on
a summarized present-value basis. An actuarial balance of zero
indicates that financing over the 75-year period is equal to
the expected cost of the program, with enough left over for a
trust fund balance at the end of the period equal to the annual
cost of the program.
The actuarial balance is expressed as a percentage of
taxable payroll over the 75-year period. Under the intermediate
assumptions of the 1998 Trustees report, the estimated
actuarial balance is -2.19 percent of taxable payroll. Because
this balance is negative, it is referred to as an actuarial
deficit. This actuarial deficit indicates that long-range
Social Security solvency could be restored by an immediate
increase in the combined payroll tax rate of about 2.2
percentage points, from 12.4 to 14.6 percent of taxable
earnings, or by any other combination of revenue increases and
benefit reductions with the same long-range financial effect.
An additional important measure for evaluating the
actuarial status of Social Security is the stability of the
financing at the end of the 75-year period. Financial stability
is achieved at the end of the period if total program income is
sufficient to meet the costs of the program and to maintain
stable trust fund reserves. Stability of trust fund reserves
means that the trust fund balance expressed as a percentage of
the annual cost of the program (the ``trust fund ratio'') is
The Office of the Chief Actuary will continue to work with
the Administration and the Congress, as policymakers develop
and consider various options for addressing the long-range
financing issues facing the Social Security program.
I will be happy to answer any questions.
Chairman Shaw. Thank you, Mr. Goss.
We have two votes that are on the floor. It is the
intention of the Chair to continue this hearing through the
lunch hour as not to unduly inconvenience any of our
witnesses--either you, Mr. Goss, or the panel that is going to
come after you. We will stand in recess just long enough to
conclude our voting, and then we shall return.
Chairman Shaw. Mr. Goss, the President, in his
recommendation on Social Security, took 62 percent of the
surplus and ran it back through the Social Security Trust Fund,
then I believe he took 20 percent of that and invested it in
equities; and then the funds that came out the other end that
were not invested in equities, which is 80 percent of the 62
percent, he then used to retire publicly owned debt--I say
publicly owned--to mean debt owned by other than the Federal
Government or the trust fund. Now, let me ask you this
question: What did that do from an actuarial standpoint to the
life of the trust fund?
Mr. Goss. From an actuarial standpoint, the money that
would be specified to be transferred to the trust funds. Our
understanding of the way in which that transfer would occur is
that it would be specified as a percentage of taxable payroll
in the law so that the money would absolutely be transferred to
the trust funds. And as you say, 20 percent, actually 21
percent, of it--of the transfer each year would be invested in
equities up to a maximum of about 15 percent of the total trust
fund assets being held in equities.
From the point of the view of the trust fund, the
additional money that would be transferred to the Social
Security Trust Fund----
Chairman Shaw. This includes the Treasury bills?
Mr. Goss. Pardon?
Chairman Shaw. That includes the Treasury bills?
Mr. Goss. Including the Treasury notes, absolutely. The
additional money transferred to the trust fund, which I think
has been widely described as totaling about $2.8 trillion
dollars over the 15-year period, would be added into the trust
funds in our calculation and would augment the trust funds both
in the bonds and in the stock reserves, and those amounts of
money would be presumed to be available when needed for
benefits in the future.
Chairman Shaw. In the form of Treasury bills?
Mr. Goss. About 85 percent of the trust fund, once we got
out to the year 2015, would be in the form of the special issue
Treasury bonds, and the other 15 percent would be presumed to
be held in equities.
Chairman Shaw. So that extended the life of the trust fund
Mr. Goss. In total with the purchase and holding of stock
included, our estimate is that the trust fund exhaustion date
would be extended to the year 2055.
Chairman Shaw. Now, that money, if you go back and look at
the way the unified budget is structured, it could certainly be
argued that that money has already been through the trust fund
once. What if you were to take that money that came out of the
other side and ran it through again? And then my next question
is going to be, and then again? And then again? And then again?
Would you push that 2045 and keep pushing that even though you
are using the same money because you are putting more and more
Treasury bills in the Social Security Trust Fund, is that not
Mr. Goss. Our view is that a crediting to the trust fund of
money for which bonds are purchased does, indeed, represent a
commitment of the Federal Government to provide revenue to the
trust funds at a future point when they are needed. And so I
would agree with you that by making a transfer that would
purchase these bonds we would, indeed, be creating a commitment
to provide the revenue in the future, and we would look at that
as having improved the actuarial status of the trust funds. The
one further point that I guess I would say----
Chairman Shaw. So, if it was a good idea to run it through
once, it is a good idea to run it through 3 or 4 times, 5
times, 10 times, 20 times. I mean, you can keep running this
money through and inflate the trust fund, and then at the end
you will still have the money left to retire some of the debt.
And you have created a fiction, and that fiction is that the
trust fund is out there with assets ready to take care of
people when they retire without being a future call on the
taxpayers or requiring any further revenue.
Mr. Goss. If I may just add, Mr. Chairman, as I think you
all know, our view on the President's proposals, or proposals
that are developed by Members of Congress, is not to judge any
of them as to whether or not----
Chairman Shaw. No, no. I am not asking you to judge it. I
am asking you strictly from an actuarial standpoint--just
strictly from the question--I mean, the more Treasury bills you
put in the trust fund, the greater--the further that line is
going to be drawn out as to when the trust fund is going to run
out of Treasury bills, because Treasury bills is all that is in
there disregarding the fact that the President's plan puts a
few stocks in there.
Mr. Goss. It is true in the assessment that we make that to
the extent that there are more Treasury bills available to the
fund that that will, indeed, advance the exhaustion date. The
only remark that I would suggest, and I am, by no means, here
as an apologist for the administration or any other entity----
Chairman Shaw. No, I am not getting into that. I
understand, and the Social Security Administration--your office
has been very helpful to this Subcommittee, and I am in no way
suggesting that your answers would be in any way skewed. So do
not worry about that.
Mr. Goss. If I could, Mr. Chairman, just reiterate the
point that you made earlier about the President's plan, keeping
in mind that we are not terribly familiar with the budget
aspects of this, more with the actuarial aspects, but it is my
understanding, as you stated, that the rationale for having the
transfers occur is to have publicly held debt reduced by some
amount along the lines of the amount of the transfers to Social
Security. However, if, as you suggest, this were done a second
or a third time, there would not be any further reduction in
publicly held debt.
Chairman Shaw. Wait a minute now. Let us back up, because I
missed a bit there. Let us just get away from the President's
plan, even though there is going to be great similarity in what
I am talking about. We run 62 percent of the surplus through
the trust fund. Period. We do not buy equities or anything
else. We have extended the life of the trust fund, actuarially.
Mr. Goss. Absolutely.
Chairman Shaw. And when it comes out the other end if we
run it through again, we are going to do that again, and again,
and again, and again. So you can, in effect, use those same
dollars, and if you run it through enough times, you can run
the life of the trust fund out to 2000 whatever you want. 2075.
2100. I mean, if you redundantly push that money through and
keep writing more and more Treasury bills, obviously you are
putting more paper into the trust fund, and you are extending
the life of the trust fund. But you really have not changed the
year in which we are going to have to seek additional revenue
to take care of the claims, is not that correct?
Mr. Goss. That is true, Mr. Chairman.
Chairman Shaw. So in my example, you have not changed that
year 2013? That 2013 is still out there, and it is still a date
of reckoning on which the Congress is going to have to make a
tough decision, either raise FICA, hopefully there would be
surplus that they could use, or raise taxes. I mean, some way
there has got to be some dollars brought into the government--
additional dollars made available that do not come out of the
trust fund that would be paid to beneficiaries under the Social
Mr. Goss. That is absolutely true. The distinction that I
think is reasonable to make in this case, though, as to where
the trust fund does have these bonds as opposed to having no
trust fund--having the trust fund being exhausted--is that
there would be a commitment of--indicating what the source of
revenue would be that would be providing the benefits in that
period. If there were no trust fund or the trust fund were
exhausted, then we would be left up in the air as to whether we
Chairman Shaw. What is wrong with the trust fund that
concerns me most. I mean, if a lawyer takes his trust fund and
goes and pays his mortgage or buys himself a speedboat or
something of that nature, and puts an IOU in the trust fund,
and then the examiners come along, and he says, well, geez,
there is plenty in there. See those IOUs? But the day of
reckoning is coming, and that is the problem that we have. And
that is the problem we are wrestling with. And that is the
problem we are stuck with, where we have to find real cash in
order to take care of the retirees of the future.
One of the things in Mr. Walker's presentation that I
thought was particularly scary was where he was showing the
number of workers that were there to support each retiree. And
it is getting down close to two workers per retiree, which is
totally unacceptable and unaffordable, particularly for low-
income people. And that is--that is what I am so concerned
about. And that is what I think we really need to concentrate
on. Mr. Cardin?
Mr. Cardin. Thank you, Mr. Chairman.
Mr. Goss, first, let me thank you for your help to those
Members of Congress who have been asking for information on how
to deal with the Social Security system. You have been very
helpful, very objective, and I think that is extremely
important that we have that type of resource available to us.
The Chairman's comments about what impact would it be if we put
more special notes or more government notes into the Social
Security system--I think we gave a very accurate reply. But, as
you pointed out, there is also the budget of the Nation. And if
you try to run more of the special notes into the Social
Security system, you will be running afoul of our budget
system. The President's proposal takes 62 percent of a surplus
that would otherwise be available for government spending;
could be available for tax cuts; could be available for any
host of reasons, but the President's proposal, as I understand
it, pays down the publicly held debt, and gives the Social
Security Trust Fund additional assets that you correctly
analyze under an actuary system of extending the life of the
Social Security--ability to pay its benefits, current
The second point I would like to make is that the
President's proposal also has a better return for the Social
Security Trust Fund. And that is real dollars in the extent
that that would extend the 2013 date; that there would be
additional funds available as a result of a better rate of
return to the system. I am correct on that, as I see you
nodding. I am curious that if we all did what we said we would
like to do, and that is make this a real trust fund, a real
trust fund with real assets that invests like fiduciaries would
invest. And if we transfer this 62 percent into the Social
Security Trust Fund, as the President has suggested; and we
then allow the trustees to do what any other trustee of any
other pension plan could do and invest, as the trustees believe
is best; and the trust invested about 60 percent to 65 percent
of its assets in equities, which is what is happening in the
real world out there. And the remainders were invested in some
types of fixed-rate returns, but better than what they are
doing on government bonds, which is the lowest rate of return.
I am curious as to how you would evaluate that in regards to
the 75-year solvency. It seems to me that we would be much
further along, and following much more the practice of the
private sector which many Members of Congress have been urging
that we do. So I just appreciate your assessment as to what
impact that would have on the--our goals of achieving a 75-year
Mr. Goss. Thank you very much, Representative Cardin. In
the analysis that we have done in the past, for instance, for
the Advisory Council, where they had a plan that would, in
fact, have 40 percent of the trust funds invested in stock, we
utilized an assumption that was developed within discussions
with the Advisory Council members, presuming that stocks would
have a seven percent real yield, which is about the average of
what stocks have realized so far this century. Using that in
conjunction with the assumed yield on the government bonds for
the other 60 percent, I believe that the roughly 2.2 percent
long-range deficit for the system was reduced by about 0.9
percent of payroll. It was reduced by not quite half. If, as
you suggest, we were to go to 60 or 70 percent in stocks,
presuming that we would be able to achieve the same yield over
and above the price of bonds, and in addition, put the other 30
to 40 percent in corporate bonds, which we believe according to
the Ibbotson data is indicated to be about one-half a
percentage point higher yield than the government bonds, you
would probably eliminate something on the order of two-thirds
of the long-range deficit of Social Security.
Mr. Cardin. And then, if you transfer the 62 percent of the
surplus into the trust fund, you get another seven or 8 years,
do you not? And then, of course, you have more assets to invest
so that has another impact. It seems to me that you are going
to be very close if not exceed the 75-year solvency if you were
to combine the President's transfer of the surplus into the
fund, and then invest like any other pension fund--whether it
is a State of Maryland pension fund, or State of California
pension fund, or a private company pension fund--if you were to
invest in a similar manner, you could deal with the problems.
I just mentioned that because--I am not making that as a
suggestion; I am not making that as a proposal, because,
obviously, the Social Security Trust Fund is very delicate, and
we need to deal with it in a special way. But there are many
here who are saying, why do not we just make this like a trust
fund? And it seems to me that if we did, we would solve a large
part of the problem that is out there; if we just allowed the
trustees to do what any other trustee of a pension plan could
do, a large part of the problem would be solved in real
dollars, as the Chairman likes to mention. This would be real
money coming in, because of a better rate of return.
I thank the Chairman.
Chairman Shaw. Oh, Mr. Collins.
Mr. Collins. Mr. Goss, do you have deductions from your
income that go into Social Security?
Mr. Goss. I am sorry, Representative?
Mr. Collins. Do you have deductions from your income that
are paid into Social Security? Are you a member of the Social
Mr. Goss. As a Federal employee, for better or for worse of
fairly longstanding, I am still, at this point, under the Civil
Service Retirement System, so my earnings at SSA are not under
the current Social Security system.
Mr. Collins. You do not have. You do not participate in the
Social Security system?
Mr. Goss. That is correct.
Mr. Collins. You opted not to. Are you part of the program
that did not have to go into it?
Mr. Goss. That is correct.
Mr. Collins. So you have a different type of retirement
system? You are a part of a retirement system?
Mr. Goss. I am--as a Federal employee hired before 1983, I
participate in the CSRS.
Mr. Collins. You belong to the Federal Employees Retirement
Mr. Goss. I participate in CSRS.
Mr. Collins. OK, that is all I have.
Chairman Shaw. Thank you, sir. We appreciate your being
with us, and we will be looking forward to working with you as
this whole thing begins to evolve.
Our next panel is Dallas Salisbury, the president and chief
executive officer, Employee Benefit Research Institute; a
former staffer of this Subcommittee, Dr. William Primus, who is
Director for Income Security, Center for Budget and Policy
Priorities; and Louis Enoff, Enoff Associates, Limited, from
Maryland. He is a former Acting Commissioner of the Social
We welcome you, gentlemen. Again, your whole testimony is
made a part of the record. And you may proceed and summarize as
you see fit.
STATEMENT OF DALLAS L. SALISBURY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE
Mr. Salisbury. Thank you, Mr. Chairman and Members of the
I appreciate this opportunity to discuss Social Security's
goals and criteria for assessing reforms. Social Security, as
has been underlined by other witnesses, plays a critical role
in providing income to the retired population, the disabled and
survivors. The primary goals of Social Security have been
reviewed by previous witnesses. I would stress one among them:
a benefit that grows in real value by passing on productivity
increases and lifestyle increases to retirees, with a benefit
formula that targeted replacement of final income as opposed to
a constant level of purchasing power. I stress this because of
the point raised by Mr. Goss that with a ``benefit reduction to
about 72 percent, current payroll taxes would, in fact, cover
all benefits.'' In my testimony's chart one, I showed what the
benefits would be that would be covered by that, and simply
note with interest that it would provide a continuous increase
in purchasing power relative to today's retirees. So it gets
back to the issue of what is a cut.
In addition, we have talked today about the criteria for
reform--whether or not a reform supports the basic goals of the
system of providing retirement income; of the redistributive
nature of the program; and of long-term financial stability.
Whether the reform fully utilizes the present administrative
and recordkeeping structure which has relative cost
efficiencies; determining whether the reform proposal changes
outcomes in terms of tax levels, benefits, income levels, and
life income streams; whether the reform proposal reduces risk
in the system or increases risk, which goes to the points of
Mr. Cardin, that in most private pension funds there have been
very wide variations or return, and as the Pension Benefit
Guaranty Corporation painfully knows, there have been some
pension funds that have gone out of business because their
return assumptions were never met; determining whether the
reform proposal strengthens, weakens or has no effect on the
existing system; and whether the affected public would support
the fundamental reform.
We have developed a comprehensive model to attempt to look
at some of these issues. That model allows us to look, for
example, at issues of equity market investment against various
assumptions and on a more dynamic income basis than so-called
static assumptions that are traditionally used by actuaries.
One of the assessments we tried to look at was an issue of
if one simply took the projected FICA surplus, or in a second
case, the projected FICA surplus plus the interest earnings and
did that as an investment into the equity markets, whether
collectively or through individual accounts. Using a static
model that has been used by most estimators, just using this
deterministic approach in the FICA surplus would still leave a
75-year deficit of eight-tenths of 1 percent.
If one invested the FICA surplus plus, the credited
interest earnings on a static basis, it would produce at
actually a 75-year surplus of 0.46 percent.
Regrettably, the world is not deterministic. Markets go up.
Markets go down. Economies ebb and flow. And using the dynamic
portion of this model, more similar to what is used by Wall
Street firms to assess financial risk, we find that using this
the FICA surplus only is more likely to create a deficit of
0.97 percent, and even using that plus interest income, a
dynamic surplus of minus 0.7 percent.
I would note that we looked at this, as the charts three
and four underlined, as to cases where scenarios would produce
positive returns and in approximately 15 percent of the
scenarios, those would be positive instead of negatives.
Last, collective investment, I would note, which is what
these estimates did look at do not include some of the
administrative costs or startup costs that would be
attributable to individual accounts or annuitization costs, so
we have actually provided a slightly more optimistic picture
than would otherwise be the case.
Administratively, I would also note that the current Social
Security Administration, with its approximate cost of $10 per
participant, per year, that $9.30 of that cost is actually the
cost of paying the annuities. Only 70 cents is for the basic
administration of the ongoing system. So some of the
comparisons to date--most assessments of using individual
accounts do not factor in that annuitization issue.
In concluding, Mr. Chairman, I would simply note that we
have included in our testimony as well an analysis of the
implications for private employer plans and proposals such as
the administration's USA proposal and would be happy in the
future to do a specific analysis using the model for all
Members of the Subcommittee. Thank you.
[The prepared statement follows:]
Statement of Dallas L. Salisbury, President and Chief Executive
Officer, Employee Benefit Research Institute
The views expressed in this statement are solely those of
the author and should not be attributed to the Employee Benefit
Research Institute, or the EBRI Education and Research Fund,
its officers, trustees, sponsors, or staff, or to the EBRI-ERF
American Savings Education Council. The Employee Benefit
Research Institute is a nonprofit, nonpartisan public policy
research organization that does not lobby or take positions on
Mr. Chairman and Members of the Committee. I appreciate
this opportunity to discuss Social Security's goals and
criteria for assessing reforms.
I appear today as President of the Employee Benefit
Research Institute (EBRI), a non-profit research organization
located here in Washington DC. EBRI does not lobby or advocate
specific actions, but has worked for over 20 years to provide
objective data and analysis that allows policy proposals to be
Our first book on Social Security was published in 1982,\1\
and we have conducted much work \2\ since then that has
documented the critical role Social Security plays in providing
income to the retired population, as well as to the disabled
and survivors. The primary goals of Social Security have been
A foundation of income for all Americans--which it
A nearly adequate income for the lowest-income
Americans--which it does.
Income protection against the ``risk'' of living
much longer than one plans, or the actuarial tables suggest, by
paying a life annuity that is indexed for inflation--which it
Dignity for retirees, by having the income paid
through a government transfer rather than requiring family
members to ask other family members for direct assistance.
A level of taxation that permits a pay-as-you go
program with a small reserve.
A benefit that grows in real value by passing on
productivity increases and life-style increases to retirees
with a benefit formula that targets replacement of final
income, as opposed to a constant level of purchasing power.
(This increase in real purchasing power is shown in Chart 1.
The chart also shows that increases in real purchasing power
would remain, even if benefits were cut to allow for full
funding under the present level of the FICA tax.)
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Many reform proposals now being discussed would change
these goals to some degree. The criteria for assessing reforms
should be to:
Determine whether a reform proposal supports these
goals, or changes them, and whether proposed changes are
Determine whether the reform fully utilizes the
present administrative and recordkeeping structure, and if not,
whether the reform proposal is feasible for implementation.
Determine whether the reform proposal changes
outcomes in terms of tax levels, benefit/income levels, and
life income streams.
Determine whether the reform proposal reduces risk
in the system or increases risks.
Determine whether the reform proposal strengthens,
weakens, or has no affect on the existing system.
Determine whether the affected public supports any
Our 1997 book, ``Assessing Social Security Reform
Alternatives,'' \3\ contains a first chapter which provides a
detailed list of sub-questions in each of these areas. Our
just-released 1999 book, ``Beyond Ideology: Are Individual
Social Security Accounts Feasible?'' \4\ applies this
methodology to individual account proposals.
Also, the EBRI-SSASIM2 model that we have developed allows
comparisons making use of analytic methods that are more
complete and dynamic than what is being used by many advocates.
Our model allows for the use of equity market return
assumptions that are consistent with economic growth
assumptions, and utilizes a thousand economic scenarios that
introduce a full range of possible economic outcomes, as
opposed to doing static straight-line projections. Our model
uses earnings projections that reflect actual lifetime income
patterns (based upon Bureau of Labor Statistics data), as
opposed to the ``unisex flat earnings for typical households''
used by most analyses. This permits assessment of effects on
more than just the ``average'' worker, and allows more accurate
measurement of ``rates of return'' on individual accounts. Our
model allows analysis of alternative forms of transition costs,
and alternative payment periods for these costs (40 year versus
70 years, etc.).
Equity Investment of the Annual FICA Surplus
One use of the EBRI model is to assess the program finance
outcome of investing the annual FICA surplus--the annual amount
of FICA taxes above the costs of the program for a particular
year--into the equity markets or into individual accounts for
workers. We modeled (first) the collective investment in
equities of just the FICA surplus, and (second) the FICA
surplus plus interest payments on the existing trust fund
balance (which would remain in special-issue U.S. Treasury
bonds). Using the actuarial assumptions from the1998 Social
Security Trustees Report, when the model is in deterministic
mode, the FICA-surplus-only investment has a 75-year actuarial
balance of -0.08 percent of taxable payroll; but if the FICA
surplus plus the interest from the bond investment is added,
the actuarial balance becomes positive at 0.46 percent of
taxable payroll (see Chart 2).
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But the real world is not deterministic, it is dynamic.
Therefore, the model was also run in stochastic (or random)
mode to evaluate what would happen if the future were allowed
to have ups and downs in the economy, as it has in the past. In
this mode, both levels of investment yielded an average
negative 75-year actuarial balance of -0.97 percent of taxable
payroll for FICA surplus only, and -0.70 percent of taxable
payroll for FICA surplus plus interest. When examining the
various scenarios, 91 percent of the scenarios resulted in a
negative 75-year actuarial balance for the FICA-surplus-only
case, while 85 percent of the scenarios had a negative 75-year
actuarial balance for the FICA-surplus-plus-interest case (see
Charts 3 and 4).
[GRAPHIC] [TIFF OMITTED] T8310.004
This would be a best-case scenario because all of the
surplus would be placed into equities, whereas if individuals
were allowed to invest in individual accounts as they saw fit,
some of the surplus would be invested in bonds. Furthermore, in
our modeling we forced the equity percentage to increase by
more than the annual FICA tax surplus regardless of the
performance of equities over the 12-year period. This is
realistic, since over 12 years it is highly improbable that
bonds would outperform equities. In addition, once the program
began to have expenses greater than revenue, funds were drawn
down in a manner that left the equity percentage the same.
Therefore, the investment in equities had a chance for long-
term returns. Lastly, collective investment does not account
for all the additional start-up and administrative costs that
would result from creating individual Social Security accounts,
and these costs would be significant.
Regarding administration, our analysis finds that a system
of personal accounts would involve a number of distinct
First, employer deduction of payroll taxes and
transmittal to a third party, with ultimate transmittal of
records on whom each dollar belongs to.
Second, receipt of the funds by a trust company or
Third, receipt of full information on the employee
and the amount of money that went to the financial
Fourth, notice to the recordkeeper and the
financial intermediary of how the money is to be invested.
Fifth, either investment by the intermediary or
the transmittal to an investment manager.
Sixth, regular reporting on investment results to
the recordkeeper so that account balances can be maintained.
Seventh, a system for servicing the worker's
account and providing information on the account, the
investments, and details on choice.
Eighth, education of the worker on the personal
account system, what ``investments'' are, what a bond, a stock,
and cash are, and on what actions they can or must take
regarding his or her individual account.
Ninth, a system for communicating ultimate annuity
options and then paying the annuities. Each of these steps
involves costs, with most estimates provided to date leaving
out many of these costs, or providing ranges based upon
frequency of choice designed into the system. Those studies
make clear that the more responsive the system, the more
A system of personal accounts that applies to all who now pay
Social Security taxes can only function at reasonable administrative
cost if it takes full advantage of the present system of payroll tax
deposits. Over 5 million employers still file all records on paper, and
many make deposits only once each year (see Chart 5). Other approaches
could be implemented but only at much higher cost to employers,
workers, and the government.
[GRAPHIC] [TIFF OMITTED] T8310.005
An individual accounts system that seeks to use the income tax
system would be more difficult to make universal and would be more
difficult to enforce, as it would be tied to over 140 million
individuals rather than six million employers, as is currently the
Basing an individual accounts system on Federal Thrift Plan (TSP)
or private 401(k) plans as a model is not an accurate comparison, since
the covered populations are very different (see Chart 6) and thus the
costs of recordkeeping and administration also would be very different.
This is most true of wage levels, and thus the expected amount of
annual contributions per account. Again, using the TSP or 401(k) model
for individual Social Security accounts would involve much higher costs
for employers, workers, and the government than is incurred under the
present Social Security program.
[GRAPHIC] [TIFF OMITTED] T8310.006
A major cost of any retirement program is the ultimate cost of
paying benefits. Only with an ultimate annuity form of payment can a
personal account be compared to the present system in terms of economic
security. Social Security currently spends over 90 percent of its total
administrative expense on annuitization and benefit payments.
Most analyses to date of individual accounts do not include an
estimate of this cost. As shown on Chart 7, administrative cost can
substantially reduce benefit levels. Even without annuity cost, a
recent analysis by the CATO Institute suggested costs of $55 to $115
per worker per year for just the cost of account administration and
funds investment. This did not include any expense for (1) education,
or (2) compliance. The CATO analysis notes that any frequent reporting
to workers, frequent investment changes, loans, or other features could
substantially increase costs. A recent report from the Heritage
Foundation notes that the system could make use of Electronic Funds
Transfers to hold down employer costs, and suggested credit bureaus as
the model for individual Social Security account administration. Most
employers in the United States currently report their payroll taxes on
paper, and the static records of credit bureaus have little of the
dynamic nature of a personal investment account.
[GRAPHIC] [TIFF OMITTED] T8310.007
Benefit Effects of Individual Accounts
When assessing reform proposals against the current Social
Security system, it is important to note that an individual
account provides a proportional benefit, meaning an equal
percentage of pay contribution at each income level. As a
result, the redistribution in the current system, or the ``non-
proportional'' delivery of benefits, is not reinforced by
individual accounts. This is shown graphically in Chart 8, as
the higher an individual's income, the higher the proportion of
total benefits that derive from the individual account.
[GRAPHIC] [TIFF OMITTED] T8310.008
USA Accounts Impact On Employer Plans
Whenever public or private employers want to create a
retirement program, they must make a number of decisions. Since
most employers have more than one retirement plan, part of the
reason for careful analysis is to avoid causing harm to other
programs. Depending on how it is designed, a Universal Savings
Account (USA) could be designed to avoid adverse consequences
for employer plans, or it could potentially cause
nondiscrimination problems for a significant percentage of
employer plans. It is premature to predict what the eventual
outcome of these ``testing problems'' may be on a plan-specific
basis; however, most sponsors would need to consider a
redesign--perhaps a drastic one--of their plans, and
undoubtedly some plan sponsors would seriously consider the
elimination of their plans. Termination of plans could reduce
retirement savings, the opposite of the intended result of USA
account creation. The primary employer design factors for
retirement programs are as follows:
Possible USA Features Option I Option II
1. Employer Contributions....... Taxable Now....... Tax Deferred
2. Worker Contributions......... Taxable Now....... Tax Deferred
3. Investment Earnings.......... Taxable Now....... Tax Deferred
4. Matching Contributions....... Amount of Match Amount of
(50%; 100%). Contribution
Matched (x% of
pay or some flat
5. Timing of Contributions...... End of Year....... Each Pay Period
6. Investment Options........... One/Few........... Many
The characteristics in bold are the most common in
employer-sponsored individual account plans today. To the
degree that a new mandatory universal government program were
less generous employer plans, one would expect that employees
would continue to participate in the employer plan. For
example, if the employer's 401(k) plan offers no match but
includes payroll deduction each pay period and several
investment options, while the government plan offers no match,
few investment options, and a contribution once each year, the
worker would likely remain in the employer plan.
However, to the extent that a new mandatory universal
government program were more generous than employer plans, one
would expect that employees would stop or reduce their
participation in the employer plan. For example, if the
employer plan offers no match, payroll deduction each pay
period and several investment options, while the government
plan offers a 50 percent match up to $600 in worker
contributions, few investment options, and a contribution once
each year, the worker would likely drop out of the employer
plan and move funds to the government plan in order to get the
To the extent that the new plan has the worker's
contribution come out of taxable income, so that taxes are not
deferred, then the balance shifts back in favor of the employer
plan, all other things being equal. For example, if an employer
has no matching contribution, a government program with a match
could affect participation in the employer plan.
Why Would It Matter if Workers Reduce Their Participation In
The tax laws that apply to employer plans are extensive and
complex. Most relevant here are the ``nondiscrimination
rules,'' which, put simply, ``test'' 401(k) plans for
relatively equal deferrals (expressed as a percentage of
compensation) between lower-paid and higher-paid workers. In
general, for ``highly compensated employees'' (known as HCEs,
or those paid $80,000 a year or more) to contribute to a
retirement plan, the ``non-highly compensated employees''
(NHCEs, or those paid less than $80,000 a year) also must do
so.\5\ Further, what the HCEs can contribute to the plan is a
direct function of what the NHCEs contribute. This means that
if the lower-paid workers choose not to participate or
contribute, the higher-paid workers would be substantially
frozen out--and there would be no reason for the employer to
sponsor the retirement plan.
As a matter of public policy, Congress could also make this
issue irrelevant by repeal of the nondiscrimination rules that
apply specifically to 401(k) plans.\6\ If this happened, the
level of participation by the NHCE group would not matter to
the HCE group. But since repeal is unlikely, we provide
The Clinton administration, it must be noted, has been
meeting with many groups in an effort to complete the design of
its USA program in a form that would not have an adverse impact
on employer plans. It is our hope that this good-faith effort
by the administration will lead to design decisions that
minimize or avoid any adverse impact on employer-based
plans.\7\ This analysis is provided to assist in those efforts.
For example, a USA-type plan design that:
Provides an automatic (non-matched) employer/
government contribution that is tax-deferred (the same as in a
Requires employee contributions to be taken from
taxable income (while 401(k) contributions are tax-deferred);
Provides no matching contribution;
would clearly provide a set of limited incentives which
would be insufficient to cause employees to leave an employer
plan, and most employees would consider themselves to be better
off contributing to the employer plan (where available) than to
the government plan.
Were there to be a government-provided match, however, then
workers in an employer plan with no match might be better off
in the USA, depending on the level of the match and whether the
match contribution is treated as taxable income or is tax-
For a number of design and administrative reasons, the
Clinton administration is unlikely to propose what was
mentioned in the State of the Union Message and described
through examples in a White House fact sheet. However, we have
used that plan for this analysis to show how much of a
difference plan design can make and why the administration is
wise to work hard on the design issue.
Recently the Employee Benefit Research Institute and the
Investment Company Institute have completed a two-year study of
the 401(k) market \8\ which has yielded detailed individual
participant records (including demographic information and
contribution behavior) from more than 27,000 plans. Due to
strict confidentiality standards, no information on the plan
sponsor's identity was included. However, the database does
break out source of contributions (e.g., employee before-tax,
employee after-tax, employer matching, qualified non-elective
contributions (QNECs), etc.) and we are currently working on a
set of computer algorithms to classify each plan by the types
of incentives provided to employees at various contribution
levels (e.g., a 2 percent QNEC plus 100 percent match for the
first 3 percent of compensation and a 50 percent match for the
next 3 percent of compensation).
When completed, this analysis will provide unique insight
into how participating employees at various compensation levels
may be expected to react to various formulae adopted by the
employer. It will also provide the basic framework for
sensitivity analysis into the likely impact of modifications in
the 415(c) and/or 402(g) limits.
Given the political timeline, we do not have the luxury of
completing the pattern recognition algorithms necessary to
identify the contribution formulae of 27,000 plans. However, we
have taken a random sample of 6,700 plans to provide some
initial insights into this policy. While this is just a small
fraction of the year-end 1996 information we have collected, we
believe it is still much more comprehensive than any other
research database in existence.\9\
It is important to note that for the preliminary analysis
we are substituting the participant-specific average employer
match for the marginal match.\10\ The analysis conducted by
Yakoboski and VanDerhei (1996) and Kusko, Poterba and Wilcox
(1994) both demonstrate the need to consider the incentive
effects of the employer's matching formulae. Our final analysis
of this proposal will provide a general framework for each plan
in which the total participant's contribution is modeled as
Total contribution = employee deferral + employer match +
Employee deferral will be subject to Internal
Revenue Service Sections 402(g) and 415(c), and potential ADP/
Employer match will attempt to replicate the
contribution formula in place for plan x in year t (e.g., 100
percent match on employee contributions up to the first 3
percent of employee compensation plus 50 percent match on
additional employee contributions up to the next 3 percent of
employee compensation),\12\ and
QNECs are determined as the amount of employer
contribution that is provided regardless of employee deferral
(e.g., 2 percent of compensation).
This substitution of variables would be expected to bias
the results if we were attempting to analyze contribution
behavior at the margin for the types of formulae seen in actual
401(k) plans where there is expected to be a significant
decrease in contribution incentives after approximately the
first 6 percent of compensation and a complete ban on deferrals
after the first $10,000.\13\ However, as long as our analysis
reflects only the relatively small level of employee
contributions discussed thus far (i.e., no more than $600 per
year), this substitution is not likely to be significant.
For purposes of passing a nondiscrimination test unique to
401(k) plans (the so-called ADP tests), it is of utmost
importance that non-highly compensated employees choose to
participate in the sponsor's plan. It is logical to assume that
if any employee with limited investible funds finds an
alternative arrangement with a higher match rate that they may
choose to reallocate some or all of their future contributions
from the 401(k) plan to the USA plan. To what extent is this
likely to happen in the existing plan population? Our findings
are summarized below.
The analysis consisted of the following steps:
A representative random sample of approximately 6,700
401(k) plans was taken from the EBRI/ICI 401(k) database in
which there was sufficient information to determine employee
deferral percentages and employer match rates for at least 90
percent of the participants in the plan.
Average match rates for each participant with the requisite
information were computed.
Each participant was categorized as to whether they were a
highly compensated employee (HCE) or non-highly compensated
Each participant was categorized as being ``at risk'' or
not. We defined a participant to be in the former category if
the employer average match rate was less than 50 percent.\14\
Average deferral percentages were computed for each plan
for the HCEs (ADPH) and the NHCEs (ADPN).
Each plan was tested to see if it passed the basic ADP
test: ADPH ADPN * 1.25.
Each plan was tested to see if it passed the alternative
ADP test: ADPH min(ADPN * 2,
ADPN + 2%).
Any plan that did not pass either of the above two tests
was excluded from further analysis.\15\
At this stage of the analysis, there are several potential
methods of modeling the likely impact from a competing plan
with matching contributions. Two methods were chosen to
illustrate the importance of behavioral assumptions in
quantifying the likely impact.\16\
Method One: Assume any NHCE that is ``at risk''
drops out of the employer's 401(k) plan while HCEs continue
their current contribution.
This ``all or nothing'' response to a governmental
competing matching plans could be justified on several grounds.
First, HCEs may not be eligible to benefit from a government
match due to potential constraints on adjusted gross income
(AGI). Second, it is highly unlikely that employees with
salaries of at least $80,000 would leave the employer plan for
a 50 percent match on only $600 (at most 0.75 percent of
The ADPs are recomputed and the percentage of plans that
would be in violation of both the basic and alternative tests
(assuming no corrective measures were taken) are tabulated and
shown in Chart 9.
[GRAPHIC] [TIFF OMITTED] T8310.009
Method Two: Allow the substitution to be
Given that a significant percentage of NHCEs are deferring
more than $600, a problem with method one is that if a NHCE
were already putting in $1,000 for a 25 percent match with the
employer's current plan, why not assume that they would put in
$600 to a 50 percent match for the government's plan and leave
the other $400 in the employer's 401(k) plan? This method
subtracts $600 (or the participant's current deferral, if less)
from each participant and recomputes their ADP's.
The percentage of plans that would be in violation of both
the basic and alternative ADP tests (assuming no corrective
measures were taken) are tabulated and shown in Chart 10. It
should be noted that this estimate of the number of plans
impacted would need to be re-estimated if AGI thresholds were
imposed for eligibility in the government's matching program.
[GRAPHIC] [TIFF OMITTED] T8310.010
Chart 9 illustrates the estimated percentage of 401(k)
plans that would be in violation of the ADP tests assuming any
NHCE that is ``at risk'' drops out of the employer's 401(k)
plan while HCEs continue their current contribution. Overall,
26 percent of all private 401(k) plans are expected to be
impacted under this assumption. The percentage of plans is
obviously a function of plan size, with only 15 percent of
plans with 1-9 participants being impacted, increasing to 35
percent of the plans with 50-99 participants. The impact
decreases for larger plans; slightly less than 25 percent of
the plans with more than 500 participants were estimated to be
Chart 10 illustrates the estimated percentage of 401(k)
plans that would be in violation of the ADP tests assuming all
employees with a match rate of less than 50 percent transfer up
to $600 of their contributions from the employer's 401(k) plan
to the government's plan. The estimated impact is obviously
much smaller, since some NHCEs that are assumed to be making
zero contributions in method one would still have some
contributions in method two (leading to a higher
ADP and all HCEs considered to be ``at
risk'' in the second method would have a smaller deferral than
in method one (leading to a smaller ADP).
Approximately 13 percent of all 401(k) plans are estimated
to be impacted under method two. This varies from a low of 7
percent for plans with less than 10 participants, to a high of
21 percent for plans with 50-99 participants.
In terms of the number of participants impacted, the plans
estimated to be impacted under method one covered 9.7 million
participants at the end of 1996 (approximately 26 percent of
the universe). Method two suggests that the impacted plans had
3.9 million participants at the end of 1996 (approximately 11
percent of all 401(k) participants).
I have made available to the Committee our studies
completed to date, and offer our assistance in carrying out
additional studies. I have also attached to this statement a
set of slides intended to add detail to some of the points
contained in my statement, including the results of a 1998
survey of small employers to determine attitudes on personal
I thank the Committee for this opportunity to appear before
you today and wish you the best as you seek to assure future
retirement income security.
Allen, Jr., Everett T., Joseph J. Melone, Jerry S. Rosenbloom and
Jack L. VanDerhei, Pension Planning: Pensions, Profit Sharing, and
Other Deferred Compensation Plans, Eighth edition, Homewood, Illinois:
Richard D. Irwin, Inc., 1997.
Clark, Robert L. and Sylvester J. Schieber, ``Factors Affecting
Participation Rates and Contribution Levels in 401(k) Plans,'' in
Olivia S. Mitchell and Sylvester J. Schieber, eds. Living with Defined
Contribution Pensions: Remaking Responsibility for Retirement
(Philadelphia: University of Pennsylvania Press, 1998).
Kusko Andrea L., James M. Poterba, David W. Wilcox. Employee
Decisions with Respect to 401(k) Plans: Evidence From Individual-Level
Data. NBER Working Paper No. 4635, 1994
VanDerhei, Jack L., Russell Galer, Carol Quick and John D. Rea.
``401(k) Plan Asset Allocation, Account Balances, and Loan Activity,''
EBRI Issue Brief, January 1999.
Yakoboski, Paul J. and Jack L. VanDerhei, ``Contribution Rates and
Plan Features: An Analysis of Large 401(k) Plan Data.'' EBRI Issue
Brief, June 1996.
\1\ Social Security: Perspectives on Preserving the System, ISBN 0-
\2\ For example, ``Retirement in the 21st Century..Ready or Not''
(1994, ISBN 0-86643-081-4), which deals with the preparation of the
baby boom for retirement.
\4\ ISBN 0-86643-092-X
\5\ Technically, it is possible for plan sponsors to also use non-
elective contributions to satisfy these tests as long as these
contributions satisfy special vesting and withdrawal restrictions.
\6\ While the analysis below focuses exclusively on the ADP tests,
a complete analysis of the public policy implications would require
similar analysis on employee after-tax and employer matching
contributions as well as the multiple use test and the potential for
401(k) sponsors to adopt the newly implemented safe harbors. See
Chapter 11 of Allen, Melone, Rosenbloom and VanDerhei (1997) for an
\7\ It is important to note that we are referring exclusively to
private 401(k) plans in the analysis below and that Section 403(b),
Section 457 and public plans may or may not have similar consequences
based on this proposal.
\8\ See VanDerhei, et. al. (1999). Analysis of account balances and
loan information was provided in addition to asset allocation
\9\ Both Yakoboski and VanDerhei (1996) and Clark and Schieber
(1998) had a large number of participants but what matters in this type
of analysis is that a sufficient number of plans be available to
determine the distribution of match rates by salary.
\10\ This variable has been used extensively in the academic
literature on an aggregate basis; however, our data provides more
powerful analysis since we are able to look at the average match for a
particular individual and observe their specific deferrals.
\11\ We will also control for the impact of both before-tax and
after-tax employee contributions. Note this is likely to be extremely
important if the final government plan design involves after-tax
\12\ N.B.: some plans involve a more complex function, possibly
incorporating the sponsor's profits.
\13\ For purposes of the 1996 data used in this analysis, the
402(g) limit was $9,500.
\14\ See Internal Revenue Code Section 414(q) for a definition.
Technically, the simplified definition of HCEs implemented by the Small
Business Job Protection Act of 1996 had not taken effect as of year end
1996 however we used the new definition to be more relevant for
predictions of impact on plans in the post 1996 environment. Moreover,
no information on the 5% owner classification is available in this
\15\ This accounted for less than 1 percent of all plans in the
sample. Technically, 401(k) plans now have the flexibility to use the
ADP generated by NHCEs in the previous year to test whether the current
year's ADP for HCEs is too high. This modification was not included in
the current analysis since the database is temporarily limited to 1996
\16\ A third method will be attempted as soon as the database is
expanded to include information on eligible employees that choose not
to contribute. Although the two methods used in these illustrations
produce conservative estimates of the impact, they are not precise in
that we are currently unable to observe non-participant eligibles that
drag the ADP for NHCEs down further than HCEs.
\17\ Technically, the smaller plans are more likely to have no HCEs
among their participants and therefore relatively immune to the impact
of a competing governmental plan on their ADP test. This influence
gives way to the fact that larger plans appear to have more generous
matches and thus are less likely to have NHCEs considered to be ``at
[The attachments are being retained in the Committee
Chairman Shaw. Thank you.
STATEMENT OF WENDELL PRIMUS, DIRECTOR OF INCOME SECURITY,
CENTER ON BUDGET AND POLICY PRIORITIES
Mr. Primus. Mr. Chairman, I appreciate very much your
invitation to testify.
My understanding of the overall budgetary framework you are
considering is as follows: continue to abide by the
discretionary caps through the year 2002 in holding nondefense
discretionary spending below inflation after 2002; enacting
substantial tax cuts which match the size of the on-budget
surplus; and then using much of the Social Security surplus to
establish individual accounts. If this actually became law,
there is a large risk that the outcome would be large budget
deficits, little reduction in the debt burden, severe
reductions in nondefense discretionary spending, and
significant new spending on the elderly.
These discretionary cuts are unrealistic. There is little
evidence to suggest that the appropriation bills can pass
Congress and be enacted that actually live within those limits.
Look at the 1999 appropriations process. The caps were
considerably less tight, and yet substantial funding had to be
designated as emergency. Or look at the bill the Senate passed
several weeks ago increasing military pay and pensions. The
reality is that the discretionary caps will be increased; the
only questions are when and by what amount.
These unrealistic discretionary cuts are then turned into
permanent tax cuts under the budget resolutions. By the year
2007, the annual cost of the tax cuts exceeds the amount of the
on-budget surplus. The tax cuts are paid for by furthering
reductions in nondefense discretionary spending. And after the
year 2009, the problem becomes greater. CBO baseline
projections indicate that the non-Social Security surplus stops
growing. But the cost of the tax cuts will likely to continue
to grow, and the result is the tax cuts would result in a
return of deficits in the non-Social Security budget.
A similar result occurs in the Social Security off-budget
accounts. The Social Security plans now under consideration
would establish individual accounts without reducing Social
Security benefits. These plans require large amounts of
additional funding, which cannot come from the non-Social
Security Surplus, because they have been used for tax cuts. The
funding must come from the Social Security surplus. However,
very soon, the cost of these individual accounts would exceed
the entirety of the Social Security surplus. At that time, this
framework would require new taxes or even deeper cuts in the
rest of government or deficit spending. Individual accounts are
essentially a new entitlement program.
At a time when we have not fully funded the promises we
have made to the elderly under the current Social Security
program, and when we face large financing gaps in Medicare and
unmet needs in other areas, why should we enact a Feldstein-
type plan which would make new promises to the elderly and
direct substantial new resources to retirement pensions without
increasing government revenues to defray these added costs.
The plan poses as a free lunch entailing no pain or tough
choices. One criterion which should be used to assess Social
Security plans is whether they boost national savings. I think
the congressional plans fall short here. Tax cuts will
primarily increase current consumption. Another criterion
should be whether the plan provides adequate benefits that are
equitably distributed and represent a fair return. Individual
account plans generally result in a less progressive
distribution of benefits that Social Security today.
One frequently hears the argument that individual accounts
yield much higher rates of return than Social Security. This is
not correct. A recent Center paper, by Peter Orszag, summarizes
an important set of papers by three economists, some of whom
are sympathetic to individual accounts. The major finding of
their work is that it is advanced funding that increases rates
of return, not individual accounts. Advanced funding will raise
rates of return, whether it occurs through individual accounts
or Social Security.
Another criterion is protection against risk. The
Feldstein plan does provide ample protection against risk,
because it guarantees participants their Social Security
benefits. However, the plan is likely to undermine political
support for Social Security as we know it today. Because people
would seem to be paying substantial payroll taxes and getting
little back from it, Social Security would appear to much of
the middle class and more affluent segments of the population
to be a bad deal.
A tax--I could not agree more with Mr. Walker--a tax or an
integration factor of 75 to 90 percent, I believe is
politically unsustainable. How can you give the American public
an account, which they manage, and which public officials say
is theirs, and then take almost all of it back when they
Another key question is whether 75-year solvency has been
restored and maintained. The President's plan receives high
marks for its emphasis on reducing the public debt. However, in
my opinion, both plans--the Feldstein plan and the
administration's--fall short on the fiscal discipline.
Under the Feldstein plan promises to the elderly are
increased. There are massive infusions of general revenues.
There are no structure reforms, and revenues are not explicitly
increased. In addition, the publicly held debt would not be
reduced very much.
Let me say, in conclusion, Mr. Chairman, you consistently
argued during the welfare debate that the States were doing the
right thing and that the Federal Government should take its cue
from what the States were doing. I believe in your new role,
Mr. Chairman, you should continue to follow your own advice and
have the Federal Government adopt two policies that the States
are doing on a regular basis, and that is investing a
considerable portion of their pension funds, the Social
Security funds in equities.
And second, the States do manage and have learned how to
set aside their pension funds and not spend or give them away
in tax cuts.
The Federal Government should be able to do the same thing.
We should not need the mechanism of individual accounts to
partially advance fund our Social Security system. Thank you.
[The prepared statement follows:]
Statement of Wendell Primus, Director of Income Security, Center on
Budget and Policy Priorities
Mr. Chairman and Members of the Subcommittee on Social
I very much appreciate your invitation to testify on the
subject of the overall budget framework and Social Security
program's goals and criteria for assessing reform proposals. My
name is Wendell Primus and I am Director of Income Security at
the Center on Budget and Policy Priorities. The Center is a
nonpartisan, nonprofit policy organization that conducts
research and analysis on a wide range of issues affecting low-
and moderate-income families. We are primarily funded by
foundations and receive no federal funding.
The Overall Budgetary and Social Security Framework of Congressional
My understanding of the overall budgetary and Social
Security framework assumed under the House and Senate budget
resolutions is as follows:
Continuing to abide by the discretionary caps
through 2002 and holding non-defense discretionary spending in
most years after 2002 below the 2002 inflation-adjusted level
(although modestly above a freeze level),
Enacting substantial net tax cuts of $778 billion
over 10 years, which would nearly equal the estimated size of
the on-budget surplus over this period, and
Using much of the Social Security surplus to
establish individual account plans and employing a variant of
the Feldstein approach.
I would like to comment briefly on the feasibility and
economic ramifications of this framework, discuss criteria for
how to judge Social Security reform and compare alternative
Social Security plans under those criteria and conclude with a
few thoughts on an alternative framework.
Understanding the Economic and Budgetary Implications of this Framework
What we have learned over the past several weeks about the
Senate and House budget resolutions is cause for serious
concern from a fiscal discipline point of view. If this
framework were enacted, there is a large risk that the eventual
outcome would be a return of large budget deficits, little
reduction in the debt burden we would pass on to our children
and grandchildren, severe reductions in non-defense
discretionary spending, large tax cuts that grow in size over
time, and significant new spending on the elderly. Policymakers
are promising more than can be delivered within the available
budgetary resources, especially once we get a few years past
the end of the 10-year budget window in FY 2009 and the baby
boom generation begins to retire in large numbers.
Unrealistic Discretionary Budget Cuts:
The budgets the Senate and House Budget Committees have
approved would require radical shrinkage over time in some
parts of the federal government. Not only would the budget
plans maintain the stringent caps the 1997 budget agreement
placed on discretionary (i.e., non-entitlement) spending for
years through 2002--which themselves would require sizeable
reductions in discretionary spending in the next several
years--but the budgets call for large additional reductions in
non-defense discretionary programs in the years after that.
The Senate and House budget resolutions include
approximately $200 billion in additional reductions in
discretionary programs between 2003 and 2009, on top of the
reductions that would result from enforcing the caps through
2002 and holding discretionary spending in fiscal years 2003
through 2009 to the fiscal year 2002 cap level, adjusted for
inflation. These additional reductions in discretionary
programs provide room for larger tax cuts than could otherwise
The cuts the House Budget resolution contains in
non-defense discretionary programs are so large that by 2009,
overall non-defense discretionary spending would be 29 percent
below its FY 1999 level, adjusted for inflation.\1\ These deep
cuts would occur although non-defense discretionary spending
already constitutes as small or smaller a share of the Gross
Domestic Product than in any year since 1962. Discretionary
cuts of this magnitude are unrealistic.
\1\ The FY 1999 level used here as a point of reference excludes
emergency spending. If emergency spending were included, the dimensions
of the discretionary cuts in the budget resolution would seem deeper.
One fact that I find astonishing is if discretionary
spending is allowed to grow just enough to preserve the same
inflation-adjusted amount of resources available to
discretionary programs as is available to these programs this
year, not including the emergency spending in fiscal year 1999,
discretionary spending would use up $824 billion--or 88
percent--of the non-Social Security surplus. In other words,
all of the projected non-Social Security surplus is due to
assumed reductions in discretionary programs.
The CBO baseline projections assume that policymakers will
keep spending within the discretionary caps.\2\ There is,
however, little evidence to suggest that appropriations bills
can pass Congress and be enacted that actually live within
those limits. Look at the 1999 appropriations process. The caps
were considerably less tight and yet substantial funding had to
be designated as ``emergency.'' In addition, the bill the
Senate passed several weeks ago on military pay and pensions
increases both discretionary spending and entitlement costs.
According to CBO, the legislation increases discretionary
spending by $40.8 billion over the next 10 years, with the
costs rising each year. The costs reach $6.5 billion a year by
2009 and would continue to rise for a number of years after
that. This requires Congress and the President to agree to make
even deeper cuts in other discretionary programs (possibly
including other defense programs). Including entitlements and
revenues, the bill's total cost is $55 billion over 10 years.
\2\ More precisely, the CBO projections assume that discretionary
spending will fit within the caps for as long as they are in place.
After 2002, when the caps are no longer in place, the projections
assume that discretionary spending will grow with inflation.
The reality is that the discretionary caps will be
increased. The only questions are when Congress will adjust the
caps and by what amount.
Tax Cuts Should Wait Until Social Security and Medicare
Programs Have Been Strengthened
The proposed House and Senate budget resolutions include
tax cuts designed to absorb most of the on-budget (non-Social
Security) surplus for the next ten years. To follow the path of
the anticipated surplus, the tax cuts start relatively small
and grow substantially over time. The proposed resolutions
include tax cuts costing $142 billion over the first five
years, with the cost rising to $636 billion in the second five-
In fact, by 2007 the annual cost of the proposed tax cuts
exceeds the amount of the on-budget surplus the Congressional
Budget Office estimates will be available.\3\ The additional
tax reduction is ``paid for'' by further reductions in non-
defense discretionary spending, beyond those that result from
adhering in years after 2002 to the cap for FY 2002, adjusted
only for inflation.
\3\ These figures are based on CBO's ``capped baseline,'' which
assumes that discretionary spending will increase with inflation after
the current caps expire in 2002. This is the standard baseline that CBO
and OMB use to estimate the extent to which the budget will be in
deficit or surplus.
Looking beyond 2009, the problem becomes still greater.
Three factors suggest these tax cuts will become unaffordable
after 2009 and would almost certainly bring back deficits in
the non-Social Security budget.
CBO baseline projections indicate that the non-
Social Security surplus stops growing and begins to shrink
during the five years after 2009.\4\ Once the surplus stops
mounting and begins to contract, there will be a smaller non-
Social Security surplus each year to support a tax cut.
\4\ The CBO baseline goes through 2009. The CBO capped baseline was
extended to 2014 for purposes of this analysis by applying the growth
rates in the CBO long-term forecast. The projections show that annual
surpluses in the non-Social Security budget begin to decline after
2012. Policy changes could shift by one or a few years the specific
year in which these surpluses begin to shrink, but such shrinkage is
virtually certain to occur some time shortly after the baby boom
generation begins to retire.
But the cost of the tax cut is likely to continue
growing substantially after 2009. The size of the tax cut in
the Senate resolution grows from $32 billion in 2003 to $177
billion in 2009, an annual average increase in cost of more
than $24 billion a year. Between 2008 and 2009, the cost grows
by $26.5 billion.\5\ If this incremental growth were to
continue in the years beyond 2009, the cost of the tax cut
would rise from $636 billion in 2005-2009 to $1.25 trillion in
the five years from 2010 to 2014.
\5\ In the Senate budget resolution, the size of the tax cut grows
by an average of $24.2 billion a year between 2003 and 2009, while in
House version the average annual growth is $24.6 billion. In the House
version, the cost grows from $30.7 billion in 2003 to $178 billion in
2009, and growth between 2008 and 2009 is $24.8 billion.
Even if growth in the tax cut could be held down to the
rate of growth in GDP in years following 2009--which is
unlikely because it would require reductions in tax relief at
that time--the cost of the tax cut in the five years from 2010
to 2014 would still exceed $1 trillion. (See Figure 1.)
With the size of the non-Social Security surpluses
beginning to decline and the cost of the tax cut continuing to
grow, the only way to avoid a re-emergence of on-budget
deficits would be to make cuts in programs on top of those that
would made by 2009. Such cuts, which could entail eliminating a
sizable share of what remained in non-defense discretionary
spending, are not likely to be achievable. As a result, the tax
cuts in the House and Senate budget resolutions would likely
result in a return of deficits in the non-Social Security
[GRAPHIC] [TIFF OMITTED] T8310.001
The projected surpluses present policymakers with a once-
in-a-generation choice. You can spend those surpluses by
cutting taxes or raising government spending and thus boosting
current consumption. Or you can save those surpluses by paying
down the debt held by the public, by strengthening Social
Security and Medicare, and raising national saving, investment
and long-term economic growth.
Tax Cuts Should Wait Because of the Economic Uncertainty
Surrounding These Budget Projections
Furthermore, if Congress and the President pass legislation
this year that is projected to result in balance or modest
surpluses in the non-Social Security budget but the economy
subsequently weakens and grows more slowly than CBO has
forecast, the non-Social Security budget will likely slide back
into deficit during the next ten years. The resulting deficits
could be substantial. CBO estimates that a downturn of the size
of the recession of the early 1990s, which was not a severe
recession as recessions go, would increase the budget deficit
(or reduce surpluses) by approximately $85 billion a year just
after the recession hits bottom.
CBO cautions that its surplus forecasts could be off by
even larger amounts if revenues grow more slowly than forecast.
Analysts do not fully understand why revenues have grown more
rapidly than projected in recent years, and they do not know
the extent to which the factors that have caused this
unexpected revenue growth are temporary or permanent. Revenue
growth in future years could be significantly lower or higher
than CBO currently projects. If it is significantly lower (and
legislation using most of the non-Social Security surpluses
currently projected has been enacted), deficits in the non-
Social Security budget are likely to return.
A drop in the stock market also would result in lower-than-
expected revenue collections, since less capital gains tax
would be collected. That, too, could push the non-Social
Security budget back into deficit.
CBO this year devoted a full chapter of its annual report
on the budget and the economy to the uncertainty of its budget
projections. CBO warned that ``considerable uncertainty''
surrounds its budget estimates ``because the U.S. economy and
the federal budget are highly complex and are affected by many
economic and technical factors that are difficult to predict.
Consequently, actual budget outcomes almost certainly will
differ from the baseline projections...'' \6\ CBO reported that
if its estimate of the surplus for 2004 proves to be off by the
average amount that CBO projections made five years in advance
have proven wrong over the past decade, the surplus forecast
for 2004 could be too high or too low by $300 billion.
\6\ Congressional Budget Office, The Economic and Budget Outlook:
Fiscal years 2000-2009, January 1999, p. 81.
A much more prudent course would be to wait several years
before enacting any substantial tax cuts to see if on-budget
surpluses of the magnitude now projected actually appear, to
determine if our unusually long-lasting economic recovery
continues to last (the probability is high that a recession
will occur sometime between now and 2009), and to determine the
levels of a realistic set of discretionary caps needed to enact
the 13 appropriations bills.
Feldstein type Plans Increase Spending on the Elderly,
Undermine Social Security as We Know It and Are Not Adequately
The Social Security plans now emerging in Republican
leadership circles appear to envision using the bulk of the
Social Security surpluses to fund individual accounts. The
Social Security proposal that I understand Chairman Shaw to be
developing, as well as the plan Senator Phil Gramm has crafted,
would establish individual accounts apparently without reducing
Social Security benefits. Such plans require large amounts of
additional funding for a number of decades. Under the proposed
budget resolutions, these new funds could not come from the
non-Social Security surplus, since the vast majority of that
surplus would be used for tax cuts. This leaves only one source
for funding these accounts--the Social Security surpluses.
However, after about 2012, the Social Security surplus is
projected to stop growing each year and start to decline, while
the cost of funding these individual accounts would continue to
increase. As a result, sometime in the five-year period from
2010 to 2014, the cost of individual accounts equal to two
percent of Social Security wages would exceed the entirety of
the Social Security surpluses. At that time, this plan would
require new taxes, even deeper cuts in the rest of government
or deficit spending. Individual accounts are essentially a
large new entitlement program.
At a time when we have not fully funded the promises we
have made to the elderly under the current Social Security
program, and when we face large financing gaps in Medicare and
unmet needs in other areas, the Feldstein plan would make new
promises to the elderly and direct substantial new resources to
retirement pensions without increasing government revenues to
defray these added costs. The plan poses as a ``free lunch''
entailing no pain or tough choices. In reality, the plan would
be likely to put programs funded through general revenues at a
substantial disadvantage and to sacrifice the needs of younger
generations to increase benefits directed to the elderly,
especially the more affluent elderly.
The plan also would weaken the progressive nature of the
current benefit structure, widening the nation's already-large
income disparities. In addition, it would establish a hybrid
private account/Social Security benefit structure not likely to
be politically sustainable over time. The plan would set in
motion a dynamic that could lead eventually to the dismantling
of much or all of Social Security as we know it today.
Summary of Economic and Budgetary Implications of Congressional Budget
The emerging Republican budget and Social Security
proposals risk exacerbating the serious fiscal problems the
nation faces when the baby-boom generation retires. Since the
tax cuts would use up the on-budget surplus while most of the
Social Security surplus was used for individual accounts, there
would be little debt reduction. As a result, these proposals
would squander a historic opportunity to reduce sharply or
eliminate the debt held by the public, and future generations
would be burdened with obligations to continue making large
interest payments on the debt far into the next century. Even
if deficit spending is avoided during the next 10 years, the
likelihood is high that in the next five-year budget window,
our public debt would again increase.
On-budget surpluses would head back to deficits
because currently projected on-budget surpluses stop growing
after 2012 while the tax cuts would continue to mount.
Off-budget surpluses head back to large deficits
at approximately the same time because the cost of individual
accounts would exceed the Social Security surpluses.
Aggravating these problems, interest payments
would still be around $200 billion a year because there would
have been little debt reduction over the previous ten years.
CBO already projects fiscal difficulty when the boomers
retire, with deficits returning sometime between 2020 and 2030
and climbing to record levels. Moreover, those projections
assume that all the surpluses are used solely for debt
reduction. Under the tax cut and individual account proposals
just discussed, deficits would return much sooner and climb
In addition, these budget proposals would require cuts of
stunning depth in non-defense discretionary programs. Due to
the magnitude of these cuts, some programs that constitute
public investments and hold promise of improving productivity--
and hence economic growth--could face the knife, as could many
programs to aid the most vulnerable members of society. Of
course, cuts of such magnitude might not be made given their
political difficulty. But then the overall fiscal picture
becomes even grimmer, given the costs of the tax cuts and the
The course these proposals chart is a troubling one. It
constitutes a high-risk undertaking that is not consistent with
building a sounder fiscal structure in preparation for the
budgetary storms that lie ahead. It also would be likely to
lead over time to some radical changes in the role and
functions of the federal government.
Key Criteria by Which Social Security Reform Proposals Should be Judged
In their book Countdown to Reform, Henry Aaron and Robert
Reischauer discuss four criteria for assessing Social Security
reform. I think these four criteria provide a sound basis for
such assessments. I also would add a fifth criterion--restoring
and maintaining program solvency in a fiscally disciplined
Boosting National Savings and Economic Growth--the
Congressional plans fall short here. The on-budget surpluses
would be devoted to tax cuts that will primarily increase
current consumption. Devoting a portion of the on-budget
surpluses to the Medicare trust fund and using those funds to
reduce the publicly held debt, as well as devoting a portion of
the surplus to Universal Savings Accounts that are saved rather
than consumed, would increase national savings more than using
these surpluses for tax cuts. If Congress in its wisdom rejects
placing more monies in Medicare or the Universal Savings
Accounts, it would be better to place these surpluses in the
Social Security trust fund and use them for debt repayment than
to use them for tax cuts.
Adequate Benefits that are Equitably Distributed and
Represent a Fair Return--Individual account plans generally
result in a less progressive distribution of benefits than
Social Security does. For example, Aaron and Reischauer's
analysis of the Feldstein plan finds it would boost government-
funded retirement income several times as much for more-
affluent workers than for low and moderately-paid workers.
One frequently hears the argument that diverting resources
to individual accounts helps everyone, because such accounts
yield much higher rates of return than Social Security. This is
not correct. A recent Center paper by Peter Orszag summarizes
and puts into layman's terms a recent and important set of
papers by economists John Geanakopolos, Olivia Mitchell and
Stephen Zeldes. The major finding of the papers by these three
economists is that it is advance funding that increases rates
of return, not individual accounts. Advance funding will raise
rates of return whether it is provided through individual
accounts or through Social Security.
The provision of funding that exceeds what is needed to pay
current benefits, often termed ``partial advance funding'' when
referring to Social Security, raises the rate of return on
contributions because such funding can be invested at the
market rate of interest; by definition, none of it is needed to
pay current benefits. Since the market rate of return is higher
than the rate of return on existing Social Security
contributions, and since each dollar of additional funding can
earn the market rate of return, additional funding secures a
higher rate of return than existing contributions do. This
higher rate of return can be captured by channeling the
additional funding through either the trust fund or individual
A corollary of this point is that creating individual
accounts out of existing Social Security payroll tax
contributions, without any additional advance funding, does not
raise the rate of return. If individual accounts are created
out of existing funding, the benefits that current workers and
retirees have accrued under Social Security must still be paid.
That drives the overall rate of return back toward its current
level under Social Security. It is the additional funding, not
the individual accounts themselves, that is crucial to
producing the higher rate of return.
As Geanakopolos, Mitchell, and Zeldes show, the statement
that individual accounts yield much higher rates than Social
Security is incorrect. Such a statement is based on an invalid
rate-of-return comparison. That Geanakopolos, Mitchell, and
Zeldes are correct is borne out by the work of the Social
Security actuaries in analyzing the three very different plans
advanced by Members of the 1994-1996 Advisory Council on Social
Security. The three plans adopted very different approaches to
individual accounts from no individual accounts (under the
Maintain Benefits plan) to relatively large individual accounts
(under the Personal Security Accounts plan). But despite the
sharply different treatment of individual accounts in the three
proposals, their estimated rates of return are very similar.
Consider, for example, an average two-earner couple born in
1997. According to projections made by the Social Security
actuaries and published in the Advisory Council report, the
real rate of return for such a couple would be:
Between 2.2 and 2.7 percent per year under the
Maintain Benefits plan, depending on the share of the Social
Security Trust Fund invested in equities;
2.2 percent per year under the Individual Accounts
2.6 percent per year under the Personal Security
In summary, the simple argument that individual accounts
necessarily provide higher rates of return than Social Security
is not valid. This argument rests on computations that either
mistakenly count the cost of Social Security benefits that must
be paid to current retirees as costs only under Social Security
and not under a system of individual accounts or
inappropriately compare the return on additional funding for
individual accounts to the return on existing contributions to
Social Security (or commit both errors).
Analytically sound comparisons also should reflect risk and
administrative costs. Individuals generally dislike risk; a
much riskier asset with a slightly higher rate of return is not
necessarily preferable to a much safer asset with a slightly
lower rate of return. Administrative costs are also important;
all else being equal, higher administrative costs reduce the
net rate of return an individual receives. When these factors
are taken into account, the supposed advantage of individual
accounts in providing higher rates of return diminishes further
and may even be reversed, given the higher administrative costs
associated with individual accounts than with Social Security.
Protection Against Risk
On one level, the Feldstein plan does provide ample
protection against risk because it guarantees all participants
a benefit as large as the Social Security benefits promised
under current law. However, the plan is likely to undermine
political support for the Social Security program as we know it
today. Because people would seem to be paying substantial
payroll taxes to Social Security and getting little back from
it, Social Security would likely appear to much of the middle
class and more affluent segments of the population to be a bad
deal. It would seem to provide them a very poor rate of return
compared to what there private accounts were paying. These
disparate rates of return would partly reflect the fact that
the Social Security trusts funds would bear all of the burden
of financing the benefits of workers who had already retired or
worked for many years before the individual accounts were
established. The trust funds also would bear all of the burden
of providing more adequate benefits to low-income retirees,
low-earning spouses and divorced women, and covering widows,
the disabled and the children of disabled and deceased workers.
Although not obvious to many workers, a sizeable portion of the
Social Security payroll tax is essentially an insurance premium
for the disability and life insurance protection that Social
Security provides. The private accounts, by contrast, would
bear none of these burdens, which would enable them to appear a
better deal to the average worker.
Also a clawback or a tax or an integration factor (whatever
it is called) of 75 percent to 90 percent is politically
unsustainable. It is unlikely that you can give the American
people accounts which they manage and which public officials
say are theirs and then take almost all of the accounts back
when they retire. Lowering the ``clawback'' percentage, however
would require deeper cuts in Social Security benefits,
increased transfers from the rest of government to Social
Security, or deficit-financing. Finally, as discussed earlier,
a Feldstein-type plan poses substantial risks for the rest of
government and for fiscal integrity.
The Feldstein plan would be complex and costly to
administer. How costly would depend upon details of the plan. A
recent study of the administrative costs of privately managed
individual accounts in the United Kingdom shows that more than
40 percent of the their value is consumed by administrative
fees and annuitization and other costs, a figure that is
significantly higher than has been acknowledged thus far in the
debate in the United States. What this experience in the U.K.
vividly illustrates is that if individual accounts are created
in the United States, a decentralized, privately managed
approach (as distinguished a Thrift Saving Plan-type approach)
could carry a variety of dangers.
Restoring and Maintaining Program Solvency in a Fiscally
A key question in assessing reform is whether 75-year
solvency has been restored and whether it is maintained. The
President's plan receives high marks for its emphasis on
reducing the public debt.
Lowering interest burdens is one of the best things we can
do for younger generations. It increases our ability to meet
our Social Security promises. The interest savings alone from
this proposal (as a percentage of GDP) would more than offset
the increase in Social Security costs that will occur under
current law over the first half of the next century. The
Administration's plan also envisions that the half of the
shortfall not closed by general-fund transfers be closed, in
whole or in large part, through more traditional methods. The
President has called for the specific changes to be identified
and agreed upon through bipartisan negotiations. To reinforce
this strategy, the Administration wants to ``Save Social
Security First''; it proposes that the increased discretionary
spending and the USA accounts contained in its budget proposal
not be created until Social Security solvency is restored.
In my opinion, both plans--the Administration's (insofar as
specifics have been provided) and the Feldstein type approach--
fall short on the fiscal discipline test. Under the
Administration's approach, the massive infusion of general
funds, if not tied to structural reforms in Social Security,
might encourage policy-makers to avoid the needed structural
reforms in Social Security (i.e. reductions in benefits and
increases in revenues). Indeed, the crediting the
Administration has proposed coupled with a higher level of
trust fund investments in equities than the Administration has
proposed could make the Social Security program solvent over 75
years without any structural changes. In my view, the transfers
the Administration proposes need to be conditioned upon making
the structural changes to close the full 75-year financing gap.
However, the Feldstein type plans fails the fiscal
discipline test to a much greater extent. Promises to the
elderly would be increased and there would be massive infusions
of general revenues. There are no structural reforms and
revenues are not explicitly increased. As I have argued
earlier, this will cause severe fiscal pressures down the road.
In addition, as a result of the combination of a Feldstein-type
plan and the proposed tax cut the publicly held debt would not
be reduced very much and therefore the interest burden on our
younger generations would remain high. Finally, while it is
assumed that a portion will be invested in equities, the manner
in which this is done (compared to investment of the trust fund
in equities) is likely to be costly and inefficient, especially
if the individual accounts are privately managed.
A Brief Description of a Fiscally Disciplined Alternative Framework
Let me briefly describe an alternative framework:
Recognize reality and adjust the discretionary
caps for fiscal year 2000 upward so that the 13 appropriation
bills can be enacted.
Transfer to Social Security or Medicare some
portion of any remaining on-budget surpluses, which would
result in further reductions in the publicly held debt.
Delay enactment of any substantial tax cuts or
substantial new spending for the out-years until the Medicare
and Social Security programs have been strengthened and there
is a better sense of how much of the on-budget surplus safely
can be used for tax reductions.
In addition to any transfers from the on-budget
surplus, further transfer to the Social Security trust fund are
appropriate to the extent that Congress is unwilling to grant
the authority to invest up to 50 percent of the Social Security
reserves in equities (a smaller percentage than state and local
pension funds invest in equities) under the management of an
independent board. To the extent that such authority is not
granted, general revenue transfers to compensate the trust fund
for this lost income are appropriate. This policy (or better
yet the actual investment of 50 percent of the trust fund in
equities) would close slightly more than 50 percent of the 75-
year financing gap. (This proposal is described in more detail
in testimony I provided earlier this year to the Senate Special
Committee on Aging.)
Close the remainder of the solvency gap by other
structural changes in the Social Security program.
Reduce the publicly held debt to zero by walling
off the Social Security surpluses in a manner that precludes
their being used for new tax reductions or spending increases.
These surpluses should be used solely for Social Security
solvency and debt repayment. A properly designed lock-box (that
automatically adjusts for changing budget estimates due to
economic and technical changes in estimates) employing a
revised pay-as-you-go rule would be the most appropriate
mechanism for accomplishing this. This pay-as-you-go rule
should be enforced with a both a sequester and a 60-vote point
of order. The bill announced yesterday by this Chairman is a
significant improvement to the lock-box mechanisms being
discussed on the Senate side. We would, however, suggest
allowing a majority rather than a super-majority vote to waive
the points of order that the bill establishes during recessions
In conclusion, Mr. Chairman, you consistently argued during
the welfare debate that the states were doing the right thing
and the federal government should take its cue from what the
states were doing. I believe, Mr. Chairman, that in this Social
Security debate, the federal government should adopt two
policies from the states. One is that 50 to 60 percent of state
pension funds are invested collectively in equities. Second, if
states have learned how to set aside their pension funds and
not spend or give them away in tax cuts, the federal government
should be able to do that as well.
Chairman Shaw. Wendell, I thank you for your compliment,
but I learned a long time ago, with great respect to you, sir,
beware of liberals bearing gifts. [Laughter.]
STATEMENT OF LOUIS D. ENOFF, ENOFF ASSOCIATES, SYKESVILLE,
MARYLAND; AND FORMER ACTING COMMISSIONER, SOCIAL SECURITY
Mr. Enoff. Thank you very much, Mr. Chairman. Mr. Chairman,
Mr. Matsui, Mr. Collins, Mr. Cardin, it is a pleasure to be
back here, and I thank you for the opportunity to be here. And
I thank you for continuing to pursue this issue, because I
think a lot has been accomplished in the discussions over the
last couple of years, I will say.
In my written statement, I have listed 12 principles that I
outlined in 1997. And these are principles that I believe
should be used in coming up with the answer to Social Security
reform. They are principles that have been developed in my 30
years of experience, working with the Social Security
Administration in the U.S., and that have been confirmed in the
5 years that I have been working in many foreign countries on
Social Security reform issues.
I have been privileged to work in 18 countries, and to
study reforms in several others. And I will say that there is
much to be learned from other countries, even though the
situations are different. There is much to be learned--both
good and bad--from the experiences, and I think we should take
that into account.
As I said in my written statement, and I will say again,
the present Social Security program has served our Nation well
in the 60 years that it has been in existence.
However, I believe the time has come for basic changes in
the program to reflect the economic, social, and political
situation in our time, and to take us into and through the next
century. I think we should look at this as if we have the
opportunity to design the program from its very inception, and
I think even those who would say we should stick with the
current program would say that starting today they would not
design the program as it currently is. I would just like to
briefly summarize those 12 points. You have heard most of these
in various parts of the testimony already this morning.
First, make sure that the reform has broad, bipartisan
Second, protect current beneficiaries and those near
Third, take extra care to protect long-term, low-income
workers and to give them the opportunity to have a say in their
Fourth, regulate carefully, but allow some flexibility.
Fifth, educate the public not only about the reforms, but
about the current program, and why it is being changed. There
is not enough known about the current program.
Sixth, give priority to the long-term security of American
workers, not to short-term fixes that take us through the next
10 years or whatever.
Seventh, honestly discuss the cost of reform and what it
would take to fix the current program. And I think that was
brought out earlier in testimony.
Eighth, give workers a say in their retirement investment.
And I want to say that that is why I think individual accounts
are important. I think that young people want to have some say.
I think that will have to be restricted in some ways. And I
will be glad to elaborate on that. But I think people want to
have a say, and I think when they have that say, experience
shows that people will put more into those accounts and save
more. And that leads to another point. We should--whatever we
do in reforming the program, we should try to increase the
savings rate in this country.
Tenth point: reform the retirement program by itself, and
then look separately at the disability and survivors program
for any changes that want to be made.
Eleven, proceed expeditiously to design and carefully to
implement. A lot has been said today about implementation.
There are some potential pitfalls. But it can be done. I think
what has to be done is a decision as to what you want and then
some careful looks at how to implement that.
And the final point I would make, try to simplify the
program if it is possible. And we have heard many potential
proposals that I have a hard time understanding, and I do not
claim to be the brightest person on this Earth, but I have
spent a lot of my years involved in Social Security programs.
And I think it would be nice if the average worker would
understand what they are paying for and what they are going to
get back and be able to calculate their benefit on their own.
Thank you very much. I would be pleased to try and answer
[The prepared statement follows:]
Statement of Louis D. Enoff, Enoff Associates, Sykesville, Maryland;
and Former Acting Commissioner, Social Security Administration
Mr. Chairman and members of the Sub-committee, thank you
for the opportunity to appear before you today and thank you
for continuing to pursue this most important topic. When I
appeared before this subcommittee in September of 1997, I
outlined eleven principles which I believed should be adopted
in designing reform of the US Social Security system. These
principles were based on my thirty years of experience in
various technical and executive positions with the US Social
Security Administration and my experience since 1993 studying
and working on social security reform in several foreign
countries. Looking back on these principles a year and a half
later, I find that they are still valid. Actually I have added
one principle, to make and even dozen, which was implicit in my
original list, but which I now believe should be explicitly
stated. That principle which I have placed number twelve in my
list is to: Develop a broad bi-partisan consensus on the basic
design of Social Security Reform. The discussion and debate
over the past eighteen months has confirmed and the twelve
principles. That discussion and some experience in other
countries has convinced me that the broad bi-partisan consensus
is needed so that changes made to our Social Security program
are changes that will take root and be allowed to develop over
a period of years and not be drastically changed by a change in
political leadership in either the legislative or executive
branches. Social Security programs are vital to the well-being
of the citizens in any country, but these are programs which by
design take years to fully develop and to deliver promised
benefits to future retirees. It is important that carefully
designed program changes be allowed to fully develop before
they are substantially modified. Constant changes in program
design serve to confuse the participants and to prevent
projected effects from happening.
I have said before and I will say again, our current Social
Security program in the US has served us well over the almost
60 years of its operation. However, it is not designed to take
us into and through the next century. Much has changed in the
years since this program was designed and it is time for some
basic changes in the program These should be carefully thought
through and modeled before implementation. And the
implementation plans must be carefully considered and
implemented. Faulty operation of a social security system can
be as critical as faulty design. My personal proposal would be
to leave a basic pay-as-you-go defined benefit plan as a first
tier and to add to that a funded mandatory defined contribution
plan as a second tier. I believe that this approach gives the
best of both worlds and allows a separate third tier to
supplement the first two tiers on a voluntary basis for
individuals. Implementing these changes will require careful
and deliberate planning and timing. There is also a need to
plan and implement several related programs to encourage older
workers to stay in the work force longer and to develop
retraining efforts to help workers in some occupations transfer
to less physically demanding vocations.
I have listed below the twelve guiding principles which I
believe will lead to a highly successful redesign of the US
Social Security program. The list is not in priority order.
While some principles are more important than others it is
difficult to give them an absolute rank. They all work together
to complement the whole package.
1. Give Priority to the Long-term retirement security of
American workers. Short term budget considerations are
obviously important. Using so called surpluses to finance some
or all of the transition cost to a funded program could provide
a tremendous boost to making the needed changes. However, we
must look at the long term picture. The needs of workers who
are just now entering the work force should be considered. Just
tinkering around the edges of the current program to fiscally
sustain it for another ten or twenty years is not really
dealing with the problem. If anything, a short term fix will
only serve to further undermine workers' confidence in the
program. Even the most ardent supporters of the current program
agree that they would not design the program as it is currently
designed if they were starting anew today.
Short term fixes can work for a time, but in the final
analysis, tackling the long term issues are what will win the
support of the workers. We see this in approaches taken in
Sweden, Argentina, Chile, the United Kingdom and some of the
recent reforms in Central and Eastern Europe.
2. Protect current beneficiaries and those near retirement
age. As has generally been stated in those proposals currently
being discussed, current beneficiaries should be protected. The
age at which those near retirement should be protected can vary
a little depending on how much choice is offered to current
workers about opting into a new plan. Until agreement is
reached on the basics of a reform plan it is probably best not
to try and specify at what age levels different options may be
available. Decisions about the indexing of benefits should be
resolved on the basis of facts and the resulting numbers
factored into the calculation of future costs for the program.
Concern for those already retired have stymied some efforts
in developing economies and still are a cause for concern with
the British system.
3. Admit that there will be a cost to transition from the
currently underfunded program. There are costs to transitioning
from a strictly pay-as-you-go program to one that includes
funded individual accounts. There are costs for the transition,
building up funds, as well as for creating the necessary
administrative structures. Both of these sets of costs will be
more than recaptured in time. The question that needs to be
addressed is over what period of time these costs should be
spread and who should participate in paying for them We should
also clearly and carefully point out what the costs would be to
try and preserve and fix the existing program.
Transparency is one of the most desirable traits of a
social security system. Countries where the government has
attempted to hide the true costs of social insurance programs
have either seen these programs fail completely or caused such
distrust by the workers as to feed the underground economy in
an effort to avoid what are seen as unfair contributions.
4. Work at simplifying the program The current program
started with a rather complex benefit formula which has become
more complex over the years. Average workers have a difficult
time computing their own benefit even if they have all of their
records. Any simplification should serve to build or restore
confidence of the workers in the program.
5. Take extra care to protect long term low income workers
from poverty. The US Social Security program has from its
inception provided for a transfer of funds from higher earning
workers to lower earning workers. This transfer is accomplished
through weighting in the benefit formula. Although this
transfer or welfare aspect of the social security program has
not always been well understood, I believe that this principle
is accepted by the majority of Americans and should be
maintained. A flat rate benefit formula would enable this
transfer to work even more transparently. However, care must be
taken to ensure that these provisions do not result in
unintended windfalls for workers who work intermittently or
casually only as a convenience rather than out of need.
The level of the basic benefit tier should be carefully
determined considering overall economic and social
considerations. Minimum requirements for this basic benefit may
determine whether the level should be at or near the poverty
level or higher to recognize the long term work effort and
contribution of the workers. Means tested or taxation of
benefit policy could be considered for preventing unintended
Some of the experience in developing countries shows that
successful programs can be created for the higher income or so-
called formal wage sector while ignoring the less organized
vocations and the self-employed. We cannot afford to exclude
any category of workers from the protection afforded by a sound
secure social security system.
6. Design any reform to try and increase the overall
savings rate in the US. The savings rate in the US is
unacceptably low, having fallen even below zero in recent
months. The current pay-as-you-go system does not add to the
individual savings rate and may in fact detract from it.
However, a two tiered system with a funded individual account
has great potential to increase the individual savings rate by
itself let alone the behavioral change that might cause
individuals to save more once they see their individually owned
accounts accruing to them or their heirs. One of the most
crucial factors here is to increase the savings rate by low
income workers. The ERA experience shows that lower level
workers are simply unable or unwilling to participate even when
tax incentives are offered. In this case an EITC type approach
could be used to stimulate more savings activity by lower
income workers and help them to begin to build equity for their
future. I also think that the idea of earnings sharing should
be further explored as a means of alleviating the low income
status of older women. Experience in England and many of the
Asian countries shows that formal mandated savings has actually
had a positive effect on overall individual savings.
7. Give workers some say in the level and investment of
their retirement funds. Many of the current proposals to reform
the current system call for an increase in the retirement age.
While I believe this is desirable, I think we have more work to
do in this area. Despite the current law provisions which call
for the normal retirement age to be raised from 65 to 67 over
the next few decades, workers continue to retire earlier. While
most of these early retirements may be by individual choice, I
continue to be concerned that we have not done enough to ensure
that workers in physically demanding jobs are able to retire or
be retrained at the age when the physical challenge becomes too
great to continue with their lifetime vocation. The proposed
two tiered system would offer at least some more choice in
deciding when to retire. At the same time we need to develop
efforts that will encourage workers to work longer.
With regard to the choice of investments for individual
accounts, I also think some choices need to be given. While
markets have developed substantially over the last 60 years and
individual workers are much more generally informed, I do not
believe we can simply let each individual workers make their
own choices on the open market. Experiences in other countries
show that this can be very dangerous and also very costly. Yet,
it is possible to develop a controlled set of options so that
workers can make an informed choice about where to invest their
individual accounts and yet be protected from unscrupulous
practices or exorbitant costs.
Some countries have given workers an option to stay in a
government sponsored second tier or to opt to the private
sector managed programs. Where this option has been left open
it has sometimes lead to workers moving back and forth between
these two options. The number of choices and options needs to
be carefully considered so as to avoid this costly back and
forth movement. This option has been discontinued in Argentina
and they have seen no ill effects.
8. Develop a comprehensive but reasonable regulatory
framework to protect the retirement accounts of workers. While
any person should be free to invest their own money as they see
fit, this is a government program designed to guarantee a
secure retirement for all workers. Such a mandatory savings
program requires a higher degree of protection against
unscrupulous practices and perhaps even against precipitous
market fluctuations. The FERS and FEHBP programs offer some
real life experience with market oriented programs that provide
for extra regulatory precautions. I believe we can benefit from
these experiences as well as the experiences of other countries
in designing the initial framework for social security reform
The efforts of the workgroup on reform implementation of the
Center for Strategic and International Studies also offers some
very sound and practical advice. In this area I believe that we
should proceed carefully and allow the set of choices to be
expanded as we gain experience.
In England and Australia the initial regulations were not
tight enough and allowed for several costly experiences. On the
other hand, the kind of tight regulation seen in Chile or some
other South American countries does not allow for the situation
as it exists in the US economic sector.
9. Educate the public about the principles and projected
outcomes of the proposed reforms as well as the principles and
projected outcomes of the current program. Accurate education
of the public about the current program is sorely lacking. Too
many citizens continue to believe that they pay their FICA into
an account that is held for them to draw from upon retirement.
Many other myths about the program continue to persist and as
mentioned earlier, few existing workers are able to calculate
their own social security benefit amount.
I sincerely hope that a broad bi-partisan agreement on
Social Security Reform can be reached soon. If it is, there
should be included a provision to educate workers about the
current program as well as the future program and why the
changes were made. If for some reason this broad consensus is
not reached soon, I would urge you to develop a bi-partisan
education effort that could be carried out in order to try and
develop a public consensus on this critical issue.
10. Proceed expeditiously to Design and carefully to
implement. While we are not in a crisis, time is of the
essence. Each day of delay in correcting problems of the
current program means additional costs. At the same time, we
and other countries have learned that changes implemented
incrementally are usually easier to accept and to implement.
While there are potential administrative problems in
implementing individual accounts, there is no question that it
can be done and it can be done successfully.
Experience in the United Kingdom is of particular value in
looking at ways to finance and develop the administrative
structure for administering individual accounts. Even with the
benefit of the experience of other countries we should allow
sufficient time to develop the necessary mechanisms. This time
lag does not have to stall the reform process, but simply
ensure reasonable implementation dates for the various program
changes. This time lag will also provide an excellent
opportunity for the public education effort discussed earlier.
11. Design a reform of the Retirement program but consider
separately the reform of the Disability and Survivors programs.
The current Social Security Disability program has a number of
substantial problems. These problems are relatively small when
compared to the magnitude of the problems with the Retirement
program and have more to do with administrative issues or
return to work incentives than they do with the financing. The
Retirement portion of the program should be redesigned on its
own and any resulting effects (such as increased retirement
age) should be considered for its effect on the disability
program along with efforts to enable more persons with
disabilities to fully participate in the economy.
Likewise, the Survivors portion of the program is
relatively small compared to the Retirement program. While some
countries have opted to purchase group insurance from the
private sector to meet the needs of families when the worker
dies prematurely, these policies are often less than adequate
especially for young families. Once a reformed Retirement
program has been designed, a careful look at the Survivors
program should be taken to ensure that benefits are adequate
and any necessary adjustments made. We should not put at risk
this vulnerable group of worker dependents.
12. Ensure that adopted reforms have broad bi-partisan
support. In several countries reforms have been implemented
only to be substantially modified with the next change of
government. This tends to lead to confusion by workers and a
lack of confidence in the system Confidence of workers should
be a hallmark of this nations retirement security program.
As I said in my opening remarks, the past 18 months have
only convinced me to a greater degree that properly designed
reforms can be successfully implemented and well received by
the population. No country has a perfect Social Security system
and even if they did it would not likely fit into the economic,
political, and social setting at this time in the US. I believe
we can learn as much or more from the mistakes made by other
countries as we can from the successes. The primary concern we
must keep in mind is the need to keep the debate honest and
straightforward. The public needs to understand the current
program and why change is necessary. Then the consensus must
develop about how to move our retirement security plans into
and through the next century.
Thank you again for the opportunity to be here today. I
would be happy to try to answer any questions you may have and
to work with you to see a successful solution of this most
Chairman Shaw. Thank you. Mr. Enoff, what restrictions
would you put on investments and what restrictions would you
put on the investor. I am speaking now not of the worker, but
who would you allow the moneys to go to for purposes of
investment? And what type of investments would you require?
Mr. Enoff. I think that at least in the initial stages,
there would have to be very strict regulation on who could run
a pension scheme. After all, we are mandating here savings by
individuals, and I do not have a problem with having some extra
regulatory authority over those firms; that they have to meet
certain qualifications. And I think we could look at what has
been done in other countries to kind of lay out a framework. I
think the Federal thrift system has some pretty basically good
guidelines that could be used as starters. I think that you
would want companies to be involved in this where they would
solely be pension investment funds for that purpose to protect
those funds. That does not mean they could not have other kinds
of activities going on, but they would have to isolate those
pension funds. I think there should certainly be regulations
that would limit the amount of investment they could have in
equities; the amount that they could have, let us say, in
foreign investments. There are some prudent-man guidelines that
are used in different countries for provident funds and for
other kinds of pension funds that we could use as a base. And
as I say, for starters, I think we would probably have to limit
the number of options that a person might have. But at least,
they should have some option.
Chairman Shaw. How broad-based would you require these
investments to be?
Mr. Enoff. When you say, how broad-based, you mean in terms
of spreading them across equities and bonds and so forth? I
think, and I have spent some time working with the CSIS Working
Group on implementation, I think that you might have to have a
kind of a joint fund until people buildup a certain amount of
equity in order to make it administratively cost effective. And
what I am saying there is that a person should buildup certain
credits in a combined fund before they could go and chose an
individual fund. Because, otherwise, the costs become
prohibitive. And I do not think that is a big problem. They
have worked that very well in the U.K. system--that part of it.
They have had some problems in the U.K. system, so I am not
saying we should adopt that wholeheartedly. But they gather the
funds into one common account that is invested, and each person
that is in that common account gets the same return for that
period of time. So it can be done.
Chairman Shaw. Mr. Matsui.
Mr. Matsui. I think that Mr. Cardin could precede me since
he was here a while ago, sir.
Chairman Shaw. Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman. First, I want to thank
all three of our witnesses. Mr. Salisbury, I think you raise a
very good point, and that is the higher the rate of return, the
greater the risk is going to be. And that is going to be the
tradeoff. That is the obvious tradeoff, so we need to be very
careful whether we have private accounts or we have collective
investments to understand that there will be greater risk the
more we want on rate of return.
Mr. Enoff, I want to thank you for your service to our
country, and I particularly appreciate our working relationship
when you were Acting Commissioner. And I think it is impossible
for us to do things to make things more simple, but I thank you
for the suggestion. Whenever we get involved, it seems to be
Wendell, I very much appreciate your testimony, because
today's hearing is based upon how do we evaluate plans that are
brought forward. And the Chairman has been--in his questioning,
has been bringing up over and over again that what we do on
Social Security has an impact on the overall budget. And I
think you really brought that to focus; that we cannot just
look at Social Security in a vacuum. We have got to look at the
total budget, because we could easily solve the Social Security
problem by taking 100 percent of the surplus, just put into
Social Security, and I think under any of the projects will
come out with dealing with the Social Security issues. But that
is not the right thing to do for our Nation, and you point that
It is interesting, if you take a look at what we are doing
today on the floor of the Congress, the budget itself, the
general approach that the administration has taken is to take
the Social Security-generated surplus and to pay down the debt,
to make it more likely that we can meet our future obligations
for Social Security. The Republican proposal appears to be to
have that money reserved to be spent for private accounts that
would help deal with our ability to meet the Social Security
obligations in the future, because of the offsets from the
private accounts and the Social Security system. But then the
rest of the surplus, the administration has suggested that we
use a significant part of that to protect Medicare, which is an
existing commitment, and then make some modest improvements on
the discretionary spending caps and a modest tax cut. Whereas,
the Republicans are suggesting using the rest of it for a large
tax cut, with unrealistic spending caps.
So I think if you put that all in context, your concerns
are real legitimate concerns of whether we are going to be able
to meet the future needs of our Nation. Yes, we might deal with
Social Security. We might be able to deal with long-term
solvency of Social Security, but at what price? Is the price
Medicare? And then we are not doing seniors any favor.
The one part, I guess, I would disagree with your analysis
is that seniors are going to be great under this or may come
out OK under this because if they do not have Medicare, we do
not deal with Medicare, then we are going to have a serious
problem for our seniors. And nothing on the table here suggests
that we are going to be able to deal with the Medicare
concerns. The first witness made it very clear that Social
Security is easy compared to the Medicare. Medicare is going to
be a much more difficult problem for us to confront. So I guess
I really just wanted to make the observations, give you a
chance to respond to that. Yes, I want to deal with Social
Security. I want to deal with it. I think we can deal with it
this year. I think we can protect the current benefits
structure. I do not think we need to raise taxes or reduce
benefits. We have got to get a better rate of return to the
system in a way that protects from manipulation by government
investment. I think we can do that. But to just use this
surplus, like it is not going to impact our budget in the
future, that we can go ahead and just spend it--whether it is
on private accounts or whether it is on tax cuts--does present
a problem as to whether we will be able to meet our current
commitments to our seniors--and Social Security and Medicare,
as well as do what is right for all people in this Nation,
whether it is education programs; whether it is health care
programs; whether it is job training, and the many others
issues that we have. I would be glad to give you a moment or
two to respond to that.
Mr. Primus. Well, thank you. You understood the testimony
very well, or you probably understood it before I gave it. But
I think you have to look at--I mean, governing is essentially
about making choices. And what I was trying to say is that if
you want individual accounts, you cannot do tax cuts and
individual accounts. You have to make a choice. I am not a fond
believer. I think we would do better doing it through a
collective mechanism. We would get more for our money, and that
is the right way to raise the rate of return. But you cannot do
all three. I think we learned that in the eighties. I would say
all that I was pointing out--your point about Medicare is
absolutely correct; that if you did adopt a Feldstein-type
approach, setting aside all the details, you are making bigger
promises to the elderly in terms of cash retirement security.
And my point is that I do not think we should make more cash
retirement security promises to our elderly right now. We
should fund the promises that we have made, both on Medicare
and Social Security. We should not be increasing those promises
and the Feldstein--so I am a conservative here, Mr. Chairman. I
do not think we should be increasing those promises, and that
is basically what happens under a Feldstein-type approach. And
I think you can get the higher rate of return by doing it as
the States are doing it. And there may be a little problem here
and there, but I think, fundamentally, you can protect and
isolate collective investment from political interference. And
we all agree that right now the best thing we should do is
reduce that publicly held debt. If we can get our interest
burden down from 3 percent of GDP to zero, we have increased
our capacity to meet promises in the future.
Chairman Shaw. I knew we would get you sooner or later,
Mr. Collins. A new conservative. I am glad I am on higher
ground. That is the reason I wear boots to protect my socks.
Mr. Enoff, it was a pleasure to listen to you, as you
suggest that we should take the ``KISS'' approach, and that is:
Keep it simple, stupid. Because I think we do have to keep it
simple so that the people that we serve understand exactly what
we will be doing and how we are going about as we save the
Social Security system itself. And, you know, I try to do a
little bit of this at home by telling people, you know, you
already have an individual Social Security number. Supposedly,
the funds that are deducted from your payroll check in the form
of payroll taxes are some way tracked. So I think it would be
just a matter of setting up another accounting system or using
the current accounting system to actually establish an
individual retirement account. And I think people would
understand that. And, like you, I think people, too, would see
that this is a system that is working. It is building something
for me, and should have the flexibility to maybe put a few more
dollars into it if they wanted to, not mandated to.
And then you are leading into a retirement program, an
actual individual retirement, rather than continuing this
episode of trying to convince people that they are under a
retirement system today. As an old-age pension program, but,
truthfully, it is nothing but a social insurance program. So I
really like your approach to that.
Mr. Primus, you are a piece of work. I am going to tell
you. You know, I understand where you are coming from on the
budget. But maybe we have, and I know we do have a different
approach to this thing. It is kind of like I told the President
1 day, we have differences of philosophy; we will just get that
over with. But that is not all bad, because, you know, you
bring a different idea to talk about than I do. But I do not
think that the budget should depend on the Social Security
system or the revenues that come from payroll taxes.
That is a whole different matter. And people at home do not
think it should--in fact, people at home do not think that this
Congress should do anything with their Social Security payroll
taxes, but put them into a Social Security account, and make
sure that they stay there. And I understand where you are
coming from with the fact that, if we reduce taxes, we have the
potential of maybe having a deficit again, unless we have the
discipline to control spending; and that, too, is what I hear
at home. Go back to the 1993 tax hike. I got more postcards
mailed into me and given to me that said: Cut spending first.
Do not raise taxes.
And I tell you, I think it would be interesting, and I hope
we can get to actually see how that tax increase of 1993, where
we changed the marginal rates, and we actually, this Congress
or that Congress, the 103d Congress increased the liability on
Social Security benefits as far as taxes are concerned. I will
have to see the number that shows over the next 10 years where
we have set aside in the budget resolution some $800 billion
that could be used for tax reduction, to see just what those
increases of that year that tax bill actually would bring in
over the same 10 years comparable to what the relief may be. I
think you will see a lot larger figure than what will actually
be given back in relief.
You talked about giving the advice to my Chairman here
about looking at these State programs. Well, the States do have
programs, but they have true pension programs in their 50
States. It is not a social insurance program that each one has.
It is a pension program. And the investments are made by
investment boards or the pension retirement boards from those
States. They are not made by some central government here in
Washington. I believe if the State retirement system sent their
money up here for Congress to invest, there would be a lot less
and a lot fewer people that would want to be a part of that
retirement program, based on the track record of some of the
things that happened here.
But we appreciate you taking the time today and to come and
give us your input and your philosophy and your side of the
story. You know, I have got my side of the story, and I am
sticking with mine, and I am sure you are going to stick with
yours, and hope you have a good day.
Mr. Primus. Can I just briefly respond, Mr. Chairman? I
think, Mr. Collins, maybe we are not as far apart as you think.
I mean, I also believe the Social Security system should be set
aside; and that those payroll taxes should be just used for
Social Security purposes. I think, if you want to establish
individual accounts, you should do it outside the Social
Security system and that those tax revenues should be reserved
for Social Security and making future benefit payments in the
And I also think that the bill that the Chairman introduced
yesterday, or announced yesterday, is a very good step in terms
of a lockbox device to make sure that the Social Security
revenues are used to pay down the national debt. And, you know,
I would not have the escape clause. I do not think you should
be using Social Security money to establish the individual
And so, if the States can do it, and they can set aside and
fully fund--and I am just arguing for more advanced funding
right now of our retirement system--if they can fully fund,
surely the Federal Government, and all of the wisdom up there
on the podium should be able to figure out a way to reserve it
and not use it for either spending increases or tax cuts. I
think that is what I am advocating. And I do not think there
may be as much difference in philosophy as you initially
Mr. Collins. I can assure you there is.
Mr. Enoff. Can I say something in this debate, because
Wendell and I agree on advanced funding? But we stop our
agreement, I think when we start talking about who ought to be
investing that, and I, you know, I think the government should
do those things that the individuals cannot do. And that is the
way we ought to start this process. And I believe in the social
insurance program. And I believe you can have a social
insurance program that includes mandatory savings with
individual accounts. There is nothing that is wrong with that.
But I think it is question of when we started this in 1935, it
was impossible to have individual accounts. But we have that
opportunity now, and I hope we do not miss the opportunity to
begin those individual accounts, and it should come out of
somehow a part of the Social Security contribution.
So, I mean, we are not that far apart maybe. Maybe we ought
to focus on that, and we could solve the issue. But I think
that is the difference. Who is the dependence on, whether we
are going to have dependency on our own account or depend on a
Mr. Collins. Well, you know, I understand, and we are a
whole lot closer together than I am with Mr. Primus over here.
But you are talking about using the current payroll tax that is
already coming out of every individual worker's paycheck rather
than setting up another mandate that would increase the burden
on those working people by taking more of their income and
giving them as an ear of corn out there to plow harder to put
more of theirs in, because many of them could not because of
the low income not having the money to put more in. So I think
it--we are a whole lot closer than Wendell and you and I are,
but I thank you all for coming.
Chairman Shaw. Mr. Matsui.
Mr. Matsui. Thanks, Mr. Chairman. Lou, I was not here for
your testimony, but were you suggesting a carve-out under the
12.4 percent for individual accounts or were you suggesting it
was over and above. I did not get it.
Mr. Enoff. I think a carve-out is a part of the solution. I
am not opposed, and I--you have been talking about Feldstein
proposal, and I have not seen--I have been out of the country.
Mr. Matsui. Well, I am not talking about that. I am just--
Mr. Enoff. OK, yes. I would suggest that there be a carve-
out. And there may even at some point, looking at how you fund
that--let's face it. We have got to fund the transition from
where we are to where we are going. That is the beginning.
Mr. Matsui. Right. How do we do that because, you know, Bob
Rubin says that transitional costs, the unfunded part is $8.5
trillion. I mean, it is pretty big numbers.
Mr. Enoff. There is an expensive transition cost which you
get back in the long run. You get it all back in the long run,
because if you are going to increase the amount of return. I
mean, I think everybody agrees on that, too. So it is a matter
of how do we pay for that transition and who should pay for the
Mr. Matsui. I am not too sure if I agree with that
conclusion. But, you know, that has been one of the problems,
but I appreciate your testimony. And Mr. Salisbury, you
probably do not remember this, but you did come to Sacramento
for a health care conference in the early eighties, and I
appreciated that. Well, he does remember everything, I tell
you. It is amazing. But thank you for that.
Wendell, let me ask you, you have studied Martin
Feldstein's plan I understand, is this correct?
Mr. Primus. That is correct.
Mr. Matsui. You know it pretty well--about as well as
Martin Feldstein knows it I guess.
Mr. Primus. He keeps changing it, but I try to keep up.
Mr. Matsui. Right. Let me ask you a couple of questions
with respect to it. Assuming a 75 percent claw back, is that
plan sustainable under the current budget situation we have
Mr. Primus. My understanding is that, again, and the
actuaries have done this, that a 2-percent plan does not
restore solvency to Social Security and would require
substantial amounts of funding, and, again, the point of the
testimony is if you spend it all on tax cuts, you do not have
the moneys left to fund Feldstein even if you wanted to,
because it takes about $80 billion or $90 billion a year; and
it is a $2.9 billion cost over the first 25 years; and
including interest, it is little over $6 trillion over the next
24 or 25 years.
Mr. Matsui. Yes, I thought my numbers were reasonably
accurate--the $4.6 trillion or $4.7 trillion over 15, but thank
you for helping me with that. And you know our surplus is only
projected out for 15 years or so. So if we do not sustain a
surplus beyond that, how does Feldstein fund itself. Do we have
Mr. Primus. Well, he is----
Mr. Matsui. I mean, that in perpetuity whereas the surplus
is only projected for 15 years. I mean, I am trying to
Mr. Primus. Right. He is suggesting that it gets funded out
of the general fund. And, you know, I think, if you again, if
you set your mind to it and tried to just make Feldstein work
and set again the whole notion of tax cuts aside, you would
have a better chance of trying to make a Feldstein plan work. I
do not think--I still think there are problems down the road,
because eventually the promises we have already made to our
baby boomers, and we start to retire in about 2010, 2013, those
deficit projections, which are now surplus projections head
south. And there is considerable uncertainty--you know, a whole
page of my testimony is devoted to this notion that those
surpluses and projections, you know, assume we are not going to
have a recession for the next 10 years, for example. I mean,
the probability of that happening is not very great. And so we
are building in, if the, again, the framework that I see in the
House and Senate budget resolutions, I think spell disaster.
You cannot do all of them.
Mr. Matsui. Now, if you take the Feldstein basic plan, and
let us say a 90-percent clawback, is that just another way of
kind of avoiding government investment, but getting into the
equity markets in order to get a greater return; but do you
have the problem of the overhead and the fund maintenance
Mr. Primus. Yes, I think the elements of this debate, as we
all agree there should be advanced funding, and we want to
raise rates of return. Everybody can give lip service to that.
The question is what is the best way of increasing the rate of
return. Should we do it through a collective mechanism, where
we do not have the administrative costs, and so forth, of
setting up 150 million accounts. And I guess the point I would
want to make, Congressman, is that there is political risk--a
lot of people have talked about the political risk of the
collective investment. But there is also political risk of
individual accounts. That means--I will give you two examples
is you never allow access to that individual account before the
individual retires. I mean the question is could you, not like
what you have done in IRAs and other retirement vehicles, say
forever, we are going to protect that individual account, and
it can only be used for retirement. That is a political risk of
that approach. Another one is can you force them annuitization.
I mean, do those plans require--I mean, Feldstein says, my plan
requires mandatory annuitization. Well, when your constituent
is in a hospice bed and you have said that $100,000 account is
yours--or if the stock market is not doing as well--will you
have the fortitude to say to that person, no that plan, we
could only give you the 6 months of benefits or however long
you live. I think those are difficult decisions. And what I am
trying to emphasize is there are political risks both ways.
Mr. Matsui. Last, Lou, could you tell me--and I am sorry,
Mr. Chairman, I just want to follow up--you were saying that
maybe you got a transition in terms of these individual
accounts, because I guess----
Mr. Enoff. Yes, sir.
Mr. Matsui. I guess risk and, you know, sophistication of
Mr. Enoff. No, sir. It is not a----
Mr. Matsui. Maybe I misunderstood you.
Mr. Enoff. Just so I am clear. There is a cost to
transition from a pay as you go to a funded program, whether
you have individual accounts or not.
Mr. Matsui. No, no, I understand that. But I sensed that
you were a little concerned--am I mistaken about this, that you
were somewhat concerned about the individual accounts, and you
have said you may have to start off by kind of a larger
Mr. Enoff. Sure. Experience.
Mr. Matsui. Experience.
Mr. Enoff. And let me--yes, experience in other countries
show that you can, in fact, keep those accounts and cause
annuitization and that there is not a hew and cry by the
population because what is the alternative. If the alternative
to the current system as opposed to an individual account, even
if I cannot touch it until I retire, it is my account when I
retire and it goes to my heirs at that point, as long as that
is well understood in advance. But I would like to say, talking
about the Feldstein plan, the President's plan, neither of them
address the question of getting people to work longer. And this
is an issue that I am afraid is going to have to be dealt with.
I mean, you look at the demographics that are pointed out
everywhere. People are retiring earlier. They are not working
longer, despite the fact that you have increased the retirement
age to 67. Still, 70 percent of the people who take their
Social Security take it before age 65. We need to do something;
we need to focus on how to encourage people to work longer.
That is not very popular. I realize most of us like to retire
probably at 45, but that has got to be a focus of a solution. I
think that if you do not deal with that issue, we are going to
have people retired for over a third of their adult life. And
you cannot build enough money to pay for that unless you
substantially raise the amount you are putting in. You cannot
get enough of a return, so we probably have to deal with that
issue. I know it is not popular, but we are going to have to
deal with it. And I suggest that we need to look at ways to
help people transition from maybe a physically demanding
occupation into one that is less demanding and look at some
gradual retirement approaches and activities like that which
will encourage people to pay into the system longer than they
are collecting out of it. That is the point.
Mr. Matsui. Well, you know the only way to do that is by
having a greater penalty upon early retirement. And obviously,
that is not politically sustainable.
Mr. Enoff. It is not sustainable, and I am not sure we have
done enough work to ensure that it does not hurt some people
who we do not want to hurt.
Mr. Matsui. Yes, absolutely.
Mr. Enoff. And so I think it needs some more work.
Mr. Matsui. I want to thank all three of you.
Chairman Shaw. Mr. McCrery.
Mr. McCrery. No questions.
Chairman Shaw. Well, I want to thank this panel. It was
certainly interesting. It is interesting to see how we all
start coming together at some points, even though we disagree
on the details. The more we study this program, the more you
realize it is only about five or six courses of action that are
even out there. And the question is just to select one. And the
one I think that is least sustainable is doing nothing. So I
think we are going to act, and hopefully, it will be in a
bipartisan way. Thank you very much for your input.
Mr. Enoff. Thank you.
Mr. Primus. Thank you.
Chairman Shaw. We are now adjourned.
[Whereupon, at 12:50 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
David B. Lowry, Attorney at Law
One Lincoln Center, Suite 530
10300 S.W. Greenburg Road
Portland, Oregon 97223
A.L. Singleton, Chief of Staff
US House of Representatives
Committee on Ways & Means
1102 Longworth House Office Bldg
Washington, DC 20515
RE: Social Security Hearing 3/25/99
Dear L.A. Singleton,
I am a lawyer with a Social Security disability law practice. Here
are some ideas on how to promote the solvency of the Social Security
1. Increase the numbers of working age taxpayers through a change
in immigration law. Have the INS recruit citizens the way football
coaches recruit players. Have the INS show up on college campuses
around the world and recruit new citizens in the top 10% of their
graduating classes, just as IBM or ITT would recruit employees. These
people will be hard working, taxpaying citizens somewhere and it might
as well be here.
I note that some countries are already advertising for American
retirees and if others can advertise for our old people, we can
certainly seek out their young people.
Let the bright, ambitious teeming masses yearning to come to
America do so.
2. Reduce the outlay of Social Security benefits by converting the
cash benefit retirees receive into a tax deduction for those with
retirement incomes of $100,000 plus from non-Social Security sources.
This will cost the IRS a little and save SSA a lot.
DAVID B. LOWRY
Statement of Cynthia Wilson, President, Retired Public Employees
Association, Inc., Albany, New York
As President of the Retired Public Employees Association,
an organization of more than 80,800 New York government
retirees and their spouses, I am writing to urge the Committee
to make the financial protection of individuals, especially
those with low and middle-level incomes, one of the major
criteria to be used in evaluating Social Security reform
There are many ways of establishing the financial stability
of the system, but there are few ways for the poor to obtain
retirement income outside of Social Security. Therefore we
recommend the rejection of any proposal
that would push the already poor deeper into
that would decrease the income of those currently
self sufficient to inadequate levels,
that would cut support for the survivors of
that would cut support for disabled workers and
that would force an increase in the costs of
means-tested programs, such as SSI which would have to be
expanded to rescue the victims of reform.
The Social Security system was established and enlarged to
assist the less fortunate in our society. It would be tragic if
the structure were stabilized at the expense of those who need
help the most.
Richard Weede Photography
14935 Highland Valley Rd.
Escondido, CA 92025
March 22, 1999
Committee on Ways and Means
1102 Longworth HOB
Washington, D.C. 20515
Re: Social Security reform
To whomever will listen:
I must first apologize for any missteps as I try to give you my
ideas for the reform of Social Security. This is the first time I have
ever written to a committee and know nothing about correct protocol. It
seems almost presumptuous of me to think that you have not already
considered this thought, but on the other hand, how can I rile about
the ``dumb things'' you do or don't do if I don't at least give you
Obviously, this is only a basic outline and will have lots of
flaws, but if looked at in a positive manner, you may find a way to
implement a similar program. This is not a near term fix, but could
certainly solve the S.S. program of the future. Here goes:
As of a certain date, give a $1000 tax refund to the parents of
each newborn child. That money would not go directly to the parents,
but to one of many pre-approved, well-established mutual funds. (The
parents would choose from the list) That money could never be touched
until the child reached 55,60,65 or whatever seems reasonable.
The only exception to the ``no touch'' rule would be when that
first ``funded child'' has a child. At that time they must roll over
$1000 into a new fund for this next generation child. At this time the
tax deduction method would no longer be necessary and the program would
fund itself automatically.
I am sure that you know that the $1000 would be worth the better
part of a million dollars at retirement age. However, incentives could
be added for the parents to add small monthly amounts to the basic
investment for the first ten years which would greatly enhance the
Of course, I realize this would only take care of retirement
benefits, but that is what S.S. was meant to be, isn't it?
What happens if the child dies? You can work on that. I can think
of a number of scenarios, but they are not as important as the basic
concept. There will be other glitches. Think positively and work them
Now don't tell me this would disrupt the entire stock market. It
might be a real boon.